Though domestic stocks have been going strong all year, Morgan Stanley has downgraded its view on global stocks.
Lower GDP and slowed economies around the world have inspired general skepticism regarding the market’s future performance. This combines with other indicators that the world as a whole may experience slowed growth in 2020.
Investors Should Be Prepared for a Pull Back
Over the next year, there may be a significant economic slowdown. While easy policy has bolstered the market thus far, weak growth is likely to eventually overpower it. That means that even though stocks have been performing well, they are unlikely to be able to continue to do so. Weak growth doesn’t always hit the market quickly. Instead, it’s more of a slow burn, as it impacts companies in all industries after some time.
Likewise, once weak growth begins to provide issues, it can take a while to recover from. This is what causes large recessions: countries pull back on their spending, which has a compounding effect. Many countries are presently slashing interest rates in order to stimulate the economy, but even this can only go so far.
Poor Returns Projected for Global Stocks
Morgan Stanley is projecting that poor returns will be available for global stocks in the coming year. That doesn’t mean that investors shouldn’t buy stocks, but that they should plan accordingly for a slow down. In fact, some global stocks may be available cheap in the coming year, and may be great buys for the savvy investor.
Investors will need to engage in proper risk management, though, if they don’t want to risk a deflation of their overall portfolio. While global stocks are likely to go down, domestic stocks have proven to be surprisingly resilient, even in the wake of repeated concerns that there could be a significant recession on the horizon.
Uncertainty Fuels the Global Market
It isn’t just general economic slowdown that has led to these downgrades. It’s also uncertainty. While the US-China trade war was expected to be resolved with some expediency, it has continued to go on. There are tariffs and trade wars going on across the globe, in addition to the uncertainty of Brexit, all of which makes it difficult to determine the economic health of the world’s markets.
This is a high risk situation: when investors cannot determine the direction the market is going to take, it’s difficult for them to invest in full faith, even if the fundamentals of a global company is strong. With this in mind, it’s very likely that investors are going to start pulling back on companies across the globe, until they are certain what the picture is going to look like.
Some Dissenting Opinions Remain
Not everyone has faith in Morgan Stanley’s downgrades, and there have been some who believe that it’s premature. Since these downgrades are proactive downgrades, some disagree that the market is going to weaken in the future.
Morgan Stanley is using 30 years of historic information, and anticipating that the cross section of easy policies and slow growth are likely to lead to a weak market. However, that’s not necessarily true: it’s possible that the market could easily pick up.
This is especially true if the before mentioned tariff situation is resolved. Once the tariff situation is resolved, many companies are going to find themselves regaining their profit centers, and companies that are competitive in the market now are going to be generating even further revenue.
A downgrade by Morgan Stanley doesn’t necessarily mean that the market is in trouble: it only means that Morgan Stanley has assessed a significant risk within the asset class, and is presently concerned about the consequences of that risk. It remains to be seen how the future will actually unfold.
Morgan Stanley’s downgrade was from equal weight to under-weight. But Morgan Stanley wasn’t negative on everything: Morgan Stanley’s favorite asset class is presently emerging-market fixed-income. Investors looking at the global market and planning their portfolios for the coming year should take these items into consideration.
Regards,
Ethan Warrick
Editor
Wealth Authority
