US stock markets are now bracing for the final stage of transition, emerging out of the covid-19 induced recession, according to Morgan Stanley’s Chief Investment Officer and Chief U.S. Equity Strategist, Mike Wilson. This phase is anticipated to see the US Federal Reserve take centre stage, tightening monetary policy and hiking interest prices, which would weigh on equity valuations. US Federal Reserve, earlier in June, had brought forward the time frame on when it will next hike interest prices. Meanwhile in India, the Reserve Bank of India (RBI) has time and once again calmed investors, saying it will continue with the accommodative stance as extended as required to revive and sustain development on a tough basis.
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Mike Wilson mentioned that Morgan Stanley’s belief that the recovery from the covid-19 recession was a great deal more sophisticated was confirmed by the National Bureau of Economic Research (NBER), which mentioned that the COVID-19 recession was more than in May of 2020 — or just two months right after it began. “This is also why stock markets have rebounded to new all-time highs in record time, too. In short, everything is happening faster than normal during this recession and recovery,” the US equity strategist mentioned.
Fed price hike coming ahead
In the mid-cycle transition narrative, promoted by Morgan Stanley considering the fact that March, the very first 3 stages have currently passed. These consist of the price of alter on financial and earnings development peaking, equity markets narrowing with fewer stocks maintaining up with the torrid pace of the initial recovery and third, leadership moving away from these sectors that do their ideal for the duration of the early stages of recovery. “The final part of the transition is still yet to come and may have a more meaningful impact on the major averages, which remain very resilient despite the deterioration in market breadth,” Mike Wilson mentioned.
Morgan Stanley analysts think that the main purpose for the resilience in the important US equity indices is the continued fall in longer-term interest prices. “This extremely low rate doesn’t exactly jibe with an economy that is growing close to 10% year over year. And the reason is crystal clear – a Federal Reserve that is moving more slowly than normal at this stage of the recovery,” they added. This slow movement of the US Fed is not sustainable, according to the brokerage firm. “… the Fed itself knows the longer it waits to start, the faster it’ll have to go later, and that could lead to financial instability, or even threaten the economic recovery,” Morgan Stanley equity strategist mentioned.
Time to go defensive
To tide more than the anticipated alter in US Fed’s stance, Mike Wilson mentioned that Morgan Stanely continues to suggest investors take a more conservative strategy and favour defensive sectors like healthcare and customer staples though making use of financials as a hedge against larger prices later this year as the Fed starts its tightening approach.
In India, the RBI’s MPC has begun its 3-day deliberations today. Most count on the monetary policy committee to retain its accommodative stance. “Given the fragile nature of recovery and uncertain outlook, we expect the MPC to maintain status quo on rates,” mentioned brokerage and analysis firm ICICI Securities. MPC is anticipated to continue prioritising supporting development more than checking inflation.