Andrew Harmstone, Morgan Stanley
One of the major threats to equity markets identified by Morgan Stanley Investment Management for 2022 is higher real yields on the back of US interest rate hikes.
An examination of historical relationships indicates that a significant rise in 10-year US Treasury real yields would put pressure on US equity multiples, argues the investment manager at their market outlook briefing.
“Major equity regions still look like they are enjoying positive earnings growth, but US equities and IT stocks are under most risk [in an environment of] rising real yields given high valuations,” said Andrew Harmstone, senior portfolio manager, global multi-asset, head of global balanced risk control, managing director at Morgan Stanley IM.
“These two sectors are also highly sensitive to real yields given the long duration of the earnings.”
“Because the market had been up for quite a few years, many investors maybe did not pay as much attention to the risk side of equities,” he added.
“The last month particularly showed that equities can go down as well as go up. Apart from other factors such as rising rates and slower earnings, the market would have to wait for investors to change their risk tolerance before it reaches a bottom.”
Non-US equities offer value
On the other hand, Harmstone believes value stocks such as energy, materials and financials, and UK equities are less exposed to rising rates and are likely to outperform in the coming year.
Morgan Stanley IM also backs Japan. “As the reopening continues this year, we expect Japan’s economy to pick up in terms of growth momentum,” said Eric Zhang, portfolio manager, Asia, head of tactical positioning, global balanced risk control, executive director at the firm.
“Last year, the supply chain crisis created problems for a number of Japanese manufacturers, but the effects are likely to dissipate in 2022.”
In the second half of this year, Zhang thinks the supply chain crisis will start to benefit some of the Japanese manufacturers as it becomes a “global phenomenon”.
Also backing European and Japanese stocks is Credit Suisse, which believes strong earnings in European luxury stocks and a declining political risk premium in Japan would benefit equities in the two economies.
