Morgan Stanley predicts new bear market
Bears are back as Morgan Stanley tips share slump
MICHAEL PASCOE January 29, 2010 - 11:18AM
The bears are out again at Morgan Stanley, predicting a 25 per cent fall in developed world stockmarkets this year. They’re just not sure whether the fall has already started or if there’s one more leg up before the dive. The analysis is aimed more at US and European markets than Australia, given our hybrid developed world/China nature, but the investment bank’s strategy team reckons Asia is riding for a fall as well. And Australian market sentiment still takes its lead from Wall Street more often than not. In his latest research note to clients, Morgan Stanley’s Gerard Minack’s own hunch is that the present wobbles will pass, allowing markets to regain their poise before the substantial mid-year fall – a bear market.
The forecast is based on two key beliefs: that markets have run well beyond fundamental justification and will become disappointed with tepid developed world economic growth; and, more or less, that “this is what always happens” after a big relief rally. “We don't think that developed equities have started an extended bull market,” writes Minack, a rational bear leading up to the GFC. “We see the rise from March 2009 as a typical relief rally that follows major bear markets. Those relief rallies can occur regardless of underlying macro conditions, regardless of liquidity conditions and - most importantly - regardless of what happens next. “The fundamentals did improve this time - systemic financial crisis ended - but we think risk assets have swung to pricing a better outlook than is likely.” He argues that the average initial relief rally is around 70 per cent – the sort of rally most developed equity markets have seen with the MSCI World market index showing 77 per cent growth from its March low. (Perhaps beneficially, the Australian market is lagging on that count, pegging closer to 60 per cent.) “After the relief rally there is, on average, a 25 per cent pull-back - so, technically, a new bear market. That's what we expect at some stage this year.”
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