Why Morgan Stanley is bearish on US equities in 2022

Investment bank Morgan Stanley is suggesting investors steer clear of US equities in 2022.

Their strategy team cited fading monetary support and high equity valuations as reasons for reducing allocations to US assets next year, despite improvements in growth and moderating levels of price inflation.

Instead, the strategy team suggests investors could find better returns in Europe and Japan.

They say that fundamentals are more attractive in both regions due to more patient central banks and lower inflationary pressures.

The annual investment outlook from Morgan Stanley described likely challenges for investment markets next year. Andrew Sheets, who leads the strategy team, said:

“We think that 2022 is really about ‘mid to late-cycle’ challenges: better growth squaring off against high valuations, tightening policy, rambunctious investor activity and inflation being higher than most investors are used to.

“We see plenty of challenges, including downside to the S&P 500 and US 10-year yields being well above forwards.”

The predictions from Morgan Stanley are the latest from investment banks as they look ahead to 2022, following a year of solid equity gains and bond selloffs.

It seems that rising prices are the most significant threat being considered by strategists.

Goldman Sachs said last week that it is forecasting less impressive growth for risk assets next year due to a maturing economic cycle.

But Morgan Stanley is expecting the S&P 500 index in the US to finish next year at 6% lower than current levels, at 4,400 points.

They also forecast a rise in 10-year US Treasury yields, rising to 2.10% by the end of next year, up from their current level of 1.55%.

Another forecast from the bank is for global inflation to peak this quarter before moderating over the next year due to easier year-on-year price comparisons and reduced supply chain pressures.

The strategies at Morgan Stanley believe a “hotter and faster” recovery will continue, driven by strong consumer spending and business investment.

These forecasts come at a time of debate around US monetary policy, with Morgan Stanley believing the US Federal Reserve will hold interest rates until 2023.

The note says that these delays to interest rate rises will eventually prompt US dollar weakness, following a period of strength.

Away from developed markets, the strategy team urged investors to remain patient, waiting for US dollar weakness to materialise before considering emerging market stocks and bonds.

In terms of commodities, they prefer oil over gold and suggest that prices for metals face a challenging year ahead.

As always, take these forecasts with a pinch of salt, as they are educated guesses at best.

When reviewing previous forecasts from all financial institutions, we have consistently seen that the actual outcome is rarely the same as the prediction.

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