One of the mysteries of the first two months of the year was the fact that the US economy was absorbing the Federal Reserve’s wave of interest rate hikes without hesitation.
The events of the last two weeks may put an end to this notion. “Every growth cycle of the past 70 years has ended in recession (c. 80% of the time) and/or a financial crisis (in 1984 and 1994),” says Graham Secker, chief European equity strategist at Morgan Stanley in London. ,
“While it was possible to argue a week ago that this observation was theoretical, we now know that it is not going to be any different this time,” he said.
His comments came after three US banks collapsed as federal authorities mobilized major banks to deposit $30 billion into First Republic Bank FRC,
To close a quarter. Credit Suisse shares of CSGN,
Meanwhile it has declined 22% this week due to concerns about its survival.
Sekar notes that financial crises do not always lead to economic recessions, as was seen in 1984, 1987, 1994, and 1998. “However, at this stage we think markets will go with ‘guilty until proven innocent’ following: 1) credit availability from banks following recent events and likely material tightening in lending standards; 2) recent events There is going to be a deeply inverted yield curve,” he said.
European stocks’ strong performance for the year was, prior to last week, driven by financials and cyclicals. But now, he says, “we believe the economic outlook has deteriorated and the window for ongoing good/correcting macro data is starting to close.” The firm upgraded the telecom sector to overweight as it also recommended “re-engagement with quality and other long-term considerations”.
Bank SX7E,
Will be volatile, but firm recommends selling at rallies keeping overweight on the sector. “It is impossible to determine how much of European banks’ underperformance is driven by concerns about the net interest margin outlook versus contagion risks versus changes in lower bond yield and rate expectations,” Secker said. “We think the latter factor has been a significant contributor and hence any rebound here could lead to some volatility in banks.”
A popular European exchange-traded fund, Vanguard FTSE Europe ETF VGK,
is up 5% this year, slightly better than the 3% gain for the S&P 500 SPX,
Sekar, however, says the bank’s concerns weaken the case for European stocks vis-à-vis US stocks.
“While we still see merit in European equities versus global peers from a valuation and earnings perspective, a rotation away from ‘cyclical value’ and towards ‘defensive/quality growth’ would not be consistent with ongoing European performance,” he added .