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Morgan Stanley Says Steer Clear of U.S. Stocks and Bonds in 2022

(Bloomberg) — Stay away from U.S. stocks and bonds next year, and seek out better returns in Europe and Japan.

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That’s the advice of Morgan Stanley’s strategy team, which sees fading monetary support and high valuations holding back American assets in 2022, even as growth improves and inflation moderates. Fundamentals are more attractive in Europe and Japan, where central bankers will be more patient and inflationary pressures are lower, according to the strategists in their annual investment outlook.

“We think that 2022 is really about ‘mid to late-cycle’ challenges: better growth squaring off against high valuations, tightening policy, rambunctious investor activity and inflation being higher than most investors are used to,” strategists led by Andrew Sheets wrote Sunday. “We see plenty of challenges, including downside to the S&P 500 and U.S. 10-year yields being well above forwards.”

After a year dominated by relentless equity gains and a selloff in bonds, strategists have begun marketing their calls for 2022 with the threat of inflation looming largest in investors minds. Last week Goldman Sachs Group Inc. said it expected less impressive returns for risk assets as the economic cycle matures.

Morgan Stanley sees the S&P 500 finishing 2022 at 4,400 — some 6% below current levels. Its strategists are penciling in 10-year yields rising to 2.10% by the end of next year on improving growth and higher real rates, up from 1.55% on Monday.

Inflation Situation

Global inflation will peak this quarter and moderate over the coming 12 months thanks to easier year-on-year comparisons and reduced supply chain pressures, the U.S. bank’s strategists wrote. A ‘hotter and faster’ recovery will continue, powered by strength in consumer spending and capital investment, they said.

Their muted market expectations come amid a wider debate at the bank over the outlook for U.S. monetary policy. Morgan Stanley economists predict the Federal Reserve won’t raise interest rates until 2023, in contrast with the more hawkish views of their own chief executive officer.

Morgan Stanley Economists See 2023 Fed Hike, Differ With Gorman

Rate hike delays will eventually lead to dollar weakness after a period of strength at the beginning of next year, according to the note.

Outside of developed markets, Sheets’ team urged patience, suggesting investors wait until the greenback weakens before considering emerging market stocks and bonds. In currencies, they favor the Canadian dollar and Norwegian krone and expect a largely stable yuan.

On the commodity front, the bank prefers oil to gold and suggested metal prices face a challenging outlook.

Morgan Stanley 2022 Recommendations

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