The worldwide economy is rebounding strongly from the recession and nearing pre-pandemic levels more rapidly than anticipated. Large fiscal stimulus and favourable monetary policy have helped in producing the recovery swift. However, as the rebound is selecting up pace, the macroeconomic outlook calls for investors to be on the edge of their seats preparing for a “hotter and shorter” midcycle transition, according to Morgan Stanley analysts. “Investors may need to reconcile early-cycle timing, midcycle conditions and pricey late-cycle valuations — especially for U.S. equities — while also factoring in potential inflation, policy changes and higher corporate taxes,” they added.
Neutral in US stocks, favour reflation trade
Morgan Stanley believes that a broader correction might be overdue for US equities now. Although analysts do not see Fed escalating prices more rapidly than anticipated but expects more tightening by the Fed later, therefore the worldwide brokerage firm now has a neutral rating on US stocks. “Midcycle transitions commonly see valuation contractions of 10% to 20%,” says Chief U.S. Equity Strategist Mike Wilson.
Going contrarian, Morgan Stanley strategist stated that reflation trade may well be more profitable for investors than the re-opening trade. “For example, price-to-earnings multiples for consumer discretionary stocks recently traded significantly higher than their historical ratio. Bank stocks, in contrast, sit relatively near their historically low valuation levels and stand to benefit from improving macro conditions and potentially higher rates,” they highlighted.
Go for thematic investing
Further, anticipating restricted upside for main equity benchmark indices, Morgan Stanley is advising investors to go for alpha-creating thematic tactics of investing. Some of the tips right here incorporate seeking at the dissociation among the US and China in important financial locations that could influence the worldwide small business approach and investment landscape.
Additional, they stated that covid-19 has accelerated the existing computing cycle, presenting possibilities, not just for the tech sector, but also for sophisticated adopters. Morgan Stanley analysts are also advising investors to preserve track of an anticipated surge in corporate spending. “This theme sits at the nexus of other big ideas, including data, decarbonization and deglobalization,” they stated.