US Investment Bank Morgan Stanley have just issued a so called “full house” buy alert on international stock markets. This “full house” buy alert is the first since February 2009 and effectively is calling the bottom of this summer’s equity falls.
Morgan Stanley announced that all five of their market timing signals were now flashing buy. This is a rare occurrence and one that in the past has lead to a V shaped recovery delivering a 23% gain in stock prices in the following 12 months.
This bold call from Morgan Stanley is one that will be respected since they were the US bank that caught the exact top of the European equity market in June 2007 using the same indication to issue a “full house” sell alert.
Morgan Stanley’s five timing tools are valuation, fundamentals, risk, capitalisation and market indicators. They capture such data as fund flows, momentum, P/E ratios, dividend yields and their relationship to bond yields.
This prediction comes at a difficult time for global investors as they try to rationalise what is really happening in China and brace themselves for the impact of the first interest rate rise in nine years. The US Federal Reserve meet on September 16th and 17th to make a decision that will have widespread impact across the globe, not least on the debtors in emerging markets with US$4.5tr of dollar denominated liabilities.
Graham Secher, Morgan Stanley’s Chief European equity strategist said “the recent sell off in global equities had largely been driven by fear and emotion and little to do with the underlying outlook for the world economy”. He added that “equities remain very cheap relative to government bonds and there is a lot of liquidity looking for a home.”
It is worth noting that dividend yields on European stock are currently 2.4% above the yield of many European government bonds. This differential is near an all-time high and such levels usually precede an equity rally.
Mr Secher went on to say “our indicators are not the Holy Grail of investing; however on the balance of probability the risk reward ratios for equities look very good”.
He also stated that “the great worry was that China may be in deeper trouble than the authorities have let on, after their failed attempts to support the Shanghai stock market and their poorly timed and ill explained decision to ditch the Yuan peg to the US$”. The economic picture may not be as bad as it looks as the latest data confirms China is slowing but still growing at rates that Western economies only dream of.
Morgan Stanley feels that China needs a shot of fresh fiscal stimulus. China’s Finance Minister Lou Jiwei has already announced that Beijing will be bringing forward a raft of infrastructure projects that will begin this year rather than next.
We share Morgan Stanley’s view of the opportunities that exist for investors but will feel more confident once we have heard Janet Yellan’s decisions over US interest rate rises and the ECB plans to continue their QE asset purchase programme in Europe. Low interest rates, loose monetary condition and low oil prices are often the catalysts for equity growth.