Morgan Stanley is going from bearish to bullish equities. Firm's upside for the S&P 500 is 1300 by end 08 at a minimum, with scope to trade higher depending on the strength of policy action to stabilize the financial system.
This is not a call that the bear market is over, or even that we have seen the lows in the current cycle, but for the rest of the year they believe the improvement in risk tolerance will outweigh the downgrade cycle in earnings. Morgan Stanley believes the risk/reward profile of the market has changed due to the following factors:
Global policy makers have woken up to the severity of the financial crisis and are expected to continue to respond aggressively as growth and systemic risks
dominate inflation concerns.
The last strands of complacency have disappeared with severe declines in emerging and non-US equities, representing a capitulation on the unrealistic decoupling theme. This has also been reflected in the change in loss leadership within the US market, with global cyclicals underperforming.
Risk tolerance is at extremely low levels as reflected in collapsed Treasury yields, elevated VIX, and considerable widening in corporate and LIBOR spreads. Aggressive and concerted global policy action, especially specific to financials, could provoke a sizeable improvement in risk tolerance.
On their fair P/E for the S&P 500 of 15.2, the implied earnings for 2009 is $79. They see this as realistic, with moderate rather than substantial downside risk.
The speed of global consolidation (i.e., BAC/MER) within the financial sector, together with regulatory intervention, will help put a floor under solvency risk even though asset quality deterioration and deleveraging will take time to work through. Firm is moving overweight Financials from neutral while reducing Healthcare overweight. They are buying NOK, COH, GS and HIG and selling SGP, DIS, MSFT and AIG.
Notablecalls: fyi
This is not a call that the bear market is over, or even that we have seen the lows in the current cycle, but for the rest of the year they believe the improvement in risk tolerance will outweigh the downgrade cycle in earnings. Morgan Stanley believes the risk/reward profile of the market has changed due to the following factors:
Global policy makers have woken up to the severity of the financial crisis and are expected to continue to respond aggressively as growth and systemic risks
dominate inflation concerns.
The last strands of complacency have disappeared with severe declines in emerging and non-US equities, representing a capitulation on the unrealistic decoupling theme. This has also been reflected in the change in loss leadership within the US market, with global cyclicals underperforming.
Risk tolerance is at extremely low levels as reflected in collapsed Treasury yields, elevated VIX, and considerable widening in corporate and LIBOR spreads. Aggressive and concerted global policy action, especially specific to financials, could provoke a sizeable improvement in risk tolerance.
On their fair P/E for the S&P 500 of 15.2, the implied earnings for 2009 is $79. They see this as realistic, with moderate rather than substantial downside risk.
The speed of global consolidation (i.e., BAC/MER) within the financial sector, together with regulatory intervention, will help put a floor under solvency risk even though asset quality deterioration and deleveraging will take time to work through. Firm is moving overweight Financials from neutral while reducing Healthcare overweight. They are buying NOK, COH, GS and HIG and selling SGP, DIS, MSFT and AIG.
Notablecalls: fyi
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