For the first time since 2007, nominal GDP growth could exceed bond yields in 2015, signifying a powerful positive signal for equities, notes Morgan Stanley.
Graham Secker and team at Morgan Stanley in their European Equity Strategy report dated January 5, 2015 titled: “A strong buy signal from MTI while macro data improving is highly unusual” point out it is rare to witness the Combined Market Timing Indicator (CMTI) deep in buy territory while macro data is improving.
Nominal GDP growth: Unusual scenario
The Morgan Stanley analysts note it is very unusual to have MTI deep in buy territory at same time as macro data is turning positive. They point that out that the CMTI remains solidly in buy territory at -1.1SD and each of their CVI (-1.8SD), Fundamental (-1SD) and Risk Indicators (-0.5SD) are all in buy territory.
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However, they note the one missing ingredient is their Capitulation indicator, which is in neutral territory currently. The analysts point out that traditionally their CMTI tends to track trends in economic indicators, hence the current divergence between improving macro data and a very low CMTI reading is highly unusual. They highlight that the only time we witnessed a -1SD reading on CMTI was when the Euro Area economic surprise index was in positive territory was March 2008.
As can be deduced from the following graph, the analysts point out that in 2015 nominal GDP growth should be above EU bond yields for first time since 2007, creating a powerful positive signal for equities:
Overweight on cyclicals and financials
Graham Secker et al highlight that their quantitative indicators say investor confidence remains muted. Though there has been a rise in European hedge fund net exposure from 34% to 42% in the second half of December, most other metrics are quite depressed, such as VIX which is up to 18, and VSTOXX is also high at 26.
The analysts note cyclical stocks would traditionally outperform the wider cyclical universe when the oil price is falling. The following charts highlight why the analysts are overweight on cyclicals and financials:
The following chart sets forth the relative cyclical winners from a lower oil price:
The following chart depicts the relative cyclical losers on a lower oil price:
The following chart captures high beta stocks offering an above-market dividend yield from the financials category:
The following two charts depict stocks that traditionally underperform when EM debt spreads are widening and EM equities are underperfoming DM equities:
Focusing attention towards refinancing beneficiaries, the Morgan Stanley analysts point out that logically stocks with high debt levels should be the biggest beneficiaries from the fall in borrowing costs. Their overweight names include: Alcatel, Lucent, Groupe and Vodafone.