US stock investors must stay cautious despite economic rebound; watch cycles, tax, inflation, policy
The global economy is rebounding strongly from the recession and nearing pre-pandemic levels faster than anticipated. Large fiscal stimulus and favourable monetary policy have helped in making the recovery swift. However, as the rebound is picking 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 may be overdue for US equities now. Although analysts do not see Fed increasing rates faster than anticipated but expects more tightening by the Fed later, hence the global 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 said that reflation trade might be more lucrative 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 limited upside for major equity benchmark indices, Morgan Stanley is advising investors to go for alpha-generating thematic strategies of investing. Some of the ideas here include looking at the dissociation between the US and China in key economic areas that could impact the global business strategy and investment landscape.
Additional, they said that covid-19 has accelerated the current computing cycle, presenting opportunities, not just for the tech sector, but also for advanced adopters. Morgan Stanley analysts are also advising investors to keep track of an expected surge in corporate spending. “This theme sits at the nexus of other big ideas, including data, decarbonization and deglobalization,” they said.