Right Teun Draaisma, and other members of the Morgan Stanley European strategy team! Come out with your hands up! This bull market looks to be over for you.
On Monday the man who said Sell Sell Sell just before share prices fell off a cliff, and then Buy Buy Buy at the nadir of The Crunch, has come over all bearish again. And given Mr Draaisma’s recent record, investors should sit up and take note. The bullet points:
A growing risk that this decade’s bull market is ending
We do not wish to bet against the growth spillover effects of the financial crisis anymore
Cutting our equity overweight to neutral, cash our preferred asset class again
We prefer large caps, strong balance sheets, high cash flow.Those new to the Morgan Stanley man’s thinking can catch up here. Others can delve into the details.
Teun’s tactical indicators are in the “neutral zone,” with positives including strong balance sheets, good earnings versus bond yields and historically cheap PEs. The Fed, meanwhile, is cutting rates. But some of the signals are at worrying levels, such as the “net futures positioning on the NASDAQ” and inflation which, while not yet a serious threat, has edged towards the MS danger zone.
But the risk here is in the fundamental picture, not tactical indicators:
The real risk is that the current credit crunch and financial turmoil will lead to a US recession, which in turn drags down the rest of the world; and that the weak dollar and high oil price is too much for the European cycle. It would be a mistake to abandon the discipline of our tactical indicators, but equally we should focus on the bigger picture most of all. We think the risks of a deterioration in the cycle have increased considerably, and for now we do not want to bet against this. We stop short of forecasting an outright recession, but we think the risks have increased considerably and will weigh on markets for the foreseeable future. Therefore, we go back to neutral in equities today, go overweight cash and stay underweight bonds.
Mr Draaisma accepts that his timing might be off slightly - markets might bounce in the short-term with further rate cuts or dollar intervention. And he is not issuing outright “sell” advice. But he wants to book some profits on his brave call to “buy” in mid August before all those profits disappear.
The Morgan Stanley man now has three big questions:
First, - big economic impact or not? - how big is this credit crunch and how likely is it to spread to the real economy? Two - traction or not? - can authorities prevent and cushion the impact on the real economy through rate cuts, for instance? And three - decoupling or not? - to what extent can the rest of the world shrug off a big US slowdown?
Since those are very big questions, we will publish Mr Draaisma’s discussion in three separate Alphaville posts.
