More upside potential seen for global equities

More upside potential seen for global equities

More upside potential seen for global equities Investors worldwide are caught in an apparent Catch-22: even though bond yields are lower than they’ve ever been, many do not want to buy stocks because of uncertainty. However, an August 12 commentary by Mike Wilson, CIO of Morgan Stanley, asserts that investors need to have more faith.
“We at Morgan Stanley Wealth Management think there is more upside potential as investors begin to appreciate the rate of change improvement in the economy, and importantly, corporate earnings,” he writes.

One reason for this belief is the firm’s out-of-consensus call that the global economy went through a harsh recession last year. “This recession was driven by the collapse in oil prices and the extremely negative knock-on effects that had on the energy, materials and industrial complexes…  growth has been recovering ever since,” he explains.

The commentary also states that major global equity markets experienced a significant earnings recession in 2015, adding that revisions in earnings estimate have bottomed out for US, Europe, Japan, and emerging market indices. This, according to the piece, should bode well for equity prices for these regions.

Providing further support are the firm’s observations that the S&P 500 Index recently broke to all-time highs in terms of market breadth (the number of stocks participating in the market) and the S&P 500 appears to be 20% to 25% undervalued considering current record-low interest rates extended to companies (resulting in lower borrowing costs).

Finally, stocks are also seen to advance even further because of the prevailingly skittish sentiment among investors, as shown by exceptionally negative money outflows from equity funds in the past few years. “To say that this is the most unloved bull market ever would not be a stretch, and this is not how bull markets usually end,” Wilson says.

Related stories:
As bonds provide costly havens, equities foreseen to pick up
Investors much too skittish, says investment expert