Morgan Stanley analysts Graham Secker, Ronan Carr, Matthew Garman, Krupa Patel and Hanyi Lim give their views on a European strategy after the surprise decision by the Federal Open Market Comittee to hold off on tapering.
Broad impact of the FOMC decision
The bullish fervor in the markets arising from the FOMC decision might be tempered down the line due to the continuing uncertainty from the on-off situation on tapering.
Voss Capital is betting on a housing market boom
The Voss Value Fund was up 4.09% net for the second quarter, while the Voss Value Offshore Fund was up 3.93%. The Russell 2000 returned 25.42%, the Russell 2000 Value returned 18.24%, and the S&P 500 gained 20.54%. In July, the funds did much better with a return of 15.25% for the Voss Value Fund Read More
In this situation Morgan Stanley (NYSE:MS) suggests investors should avoid getting distracted by the tapering debate and instead focus on fundamentals.
Let fundamentals determine the direction of investment prices, the analysts say, but let the extent of QE determine the quantum of the price move. However, the analysts suggest some caution because though the FOMC decision may have removed the overhang of a correction, it leaves the market vulnerable to other ‘bad news.’
Key identified trends
– Developed markets are ‘normalizing,’
– Europe is in the midst of a fledgling recovery,
– Bond yields will tend to push higher
– Emerging markets macro conditions are uncertain
Given the above dominant themes, Morgan Stanley recommends that investors be overweight on Value, and overweight on European Financials.
The main rationale for Value is improving economic growth, still cheap valuations compared to Growth, wide dispersion and rising bond yields.
Morgan Stanley view European financials as attractive for the following reasons:
– EU GDP exposure is more pronounced for financials
– Financials have been chronic underperformers
– Attractive valuations with the lowest PEG ratios and rising dividend yields
– Financials ROE have been depressed for overly long, making them cheap in the context of normalized valuations
– Strong projected EPS growth over the next couple of years
– Compared to currently favored Cyclicals, Financials offer better opportunity because their EPS and ROE are very low in comparison; Cyclicals trade at much richer valuations, and investors already carry a significant quantum of Cyclicals in their portfolios.