Morgan Stanley cuts and runs from tech and consumer discretionary stocks

[opexlong]

An intriguing article which appeared in today's Business Insider:

MORGAN STANLEY: The stock market has reached a 'tipping point' - and the market's most beloved companies could be hit hardest

[Morgan Stanley] favors energy, utilities, and financials over tech and consumer discretionary stocks.

The fact that [FAANGs] are starting to falter is a glaring late-cycle signal for Morgan Stanley, which sees a rotation into unloved names playing out.

Utilities, which offer a steady return similar to bonds, may look like an odd choice in an era of rising rates, but Morgan Stanley said more defensive stocks might prove their worth once the US economy started to slow - and that could happen faster than markets expect.

It said US growth was likely to be interrupted by a cyclical bear market as soon as next year, once the boost from President Donald Trump's tax cuts wear off.

"Our concern lies with the fact that 2019 consensus forecasts do not anticipate such a dynamic at all," the analysts said.

Note: This is the Morgan Stanley equities team, which AFAIK invest on behalf of the company. Morgan Stanley Wealth Management, which advises a string of wealthy retail clients, already recommended taking profits in the consumer discretionary sector last month.

Like it or loathe it, the job of these analysts is to anticipate market cycles and evade the pain if they can. (Though I know many here object to this on a philosophical or metaphysical basis. Which is fine, we all have our point of view.)

My main problem with this article is that they don't mention the specific relationship between rising interest rates and the subsequent tightening of the free flow of discretionary income which tech-gadget and other luxury-item companies rely on for their business model.

Anecdotal data and statistical data (on low levels of savings and record-high levels of consumer debt) tell us that people are borrowing money in order to buy things like cars and smartphones. Will people still do this as borrowing becomes more expensive?

A liquidity crunch would pulverise the markets in a heart-beat. But even a modest decrease of borrow-and-spend behaviour could just lead to a gradual downturn in certain sectors. They could peter out over a number of years.

Morgan Stanley's choices for a defensive portfolio are interesting. I'm contemplating food commodity stocks at their cyclical lows (coffee, sugar, corn) and, more sceptically, precious metals stocks (gold, silver).

What do others here think - both of Morgan Stanley's reasoning and the best prospects for capital preservation within the markets?

 

[Brendan Burgess]

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[Steven Barrett]

In January 2016, RBS said:

1. The downside is crystallising
2. Watch Out
3. Sell (mostly) everything
4. The game is up
5. The World is in trouble
6. Sell everything except high quality bonds
7. As we said into the credit crunch in 2008, this will be as much as limiting losses as making gains

If you had listened to them, you would have missed 30% gains in the World Equity markets and 40% if you'd gone with the US only. Morgan Stanley may be right but they may also be wrong...just like lots of other investment houses who have made predictions in the past.

But in 10/ 20 years time, do you expect the stock market to be higher than it is today?


Steven
www.bluewaterfp.ie

 

[opexlong]

If you had listened to [RBS] you would have missed 30% gains in the World Equity markets and 40% if you'd gone with the US only. Morgan Stanley may be right but they may also be wrong...just like lots of other investment houses who have made predictions in the past.

Yes, but the distinction between RBS's position in 2016 and Morgan Stanley's now is that the latter are not talking about fleeing the equities markets - they're deserting certain sectors (tech, consumer) in favour of other sectors (energy, utilities, financials) within the markets. It's a switch-up, not a fire sale.

If you hold on to tech and consumer discretionary stocks then you are also making a prediction - that they will go up, or stay up, or survive for as long as you need them to.

Once we agree that a person's better off in the markets then there is no neutral state of not making predictions for the future.

 

[noproblem]

For people invested in a different range of funds, will the managers of these funds change around different shares within the funds because of advice like this?

 

[Steven Barrett]

Tech stocks take a battering

 

[Jim2007]

Like it or loathe it, the job of these analysts is to anticipate market cycles and evade the pain if they can. (Though I know many here object to this on a philosophical or metaphysical basis. Which is fine, we all have our point of view.)

No their job is to sell the company services while trying to ensure that they do not expose the company to any losses through investor litigation. Their advice now is in their best interests, it is to ensure that all mugs who have been playing the game with them for the past few years and paying fees to do so are not in a position to come after them when the market blows.

Yes, but the distinction between RBS's position in 2016 and Morgan Stanley's now is that the latter are not talking about fleeing the equities markets - they're deserting certain sectors (tech, consumer) in favour of other sectors (energy, utilities, financials) within the markets. It's a switch-up, not a fire sale.

It’s known as the “this time it is different” argument, except it never is. Morgan Stanley are doing exactly as to be expected, the only question was who was going to jump first. It is market timing and a fools game for the investors, but Morgan Stanley are not concerned about the investor, they are concerned about covering their own ass.

For people invested in a different range of funds, will the managers of these funds change around different shares within the funds because of advice like this?

It would depend entirely on the objectives of the fund and the manager’s discretionary powers. But in any case he would be advised by buy side analysts rather than sell side analysts.

Tech stocks take a battering

Never invest in tech stocks, the business model is far too complex to forecast!

 

[Firefly]

but Morgan Stanley are not concerned about the investor, they are concerned about covering their own ass.

It would be interesting to know if they have many short positions on tech...

 

[Jim2007]

It would be interesting to know if they have many short positions on tech...

They have no positions short or otherwise, they do not deal on their own account, it would constitute a major conflict of interest!

They will hold various positions in the process of product construction, but these are not investing positions and an inference from them would be very dangerous since you have no idea as to their purpose.

 

[RichInSpirit]

Advice from a hedge fund provider. I am immediately suspicious.

 

[opexlong]

They will hold various positions in the process of product construction, but these are not investing positions and an inference from them would be very dangerous since you have no idea as to their purpose.

Advice from a hedge fund provider. I am immediately suspicious.

But I didn't ask about their motives. I asked about their reasoning. There are also hedge fund providers, like Richard Bernstein, who advise holding on to tech stocks. He might be badly-motivated too.

In fairness I did get answers of a kind from Steven and Jim.

But all stock-picking involves a certain speculative element. Even if you just hold an index fund the index fund provider could go out of business suddenly. So you aren't in a neutral state of avoiding making predictions of any kind.