Currently, markets are flooded with liquidity and benchmark indices are scaling fresh highs but valuations suggest the risk is elevated.
With the US economy now re-opening and getting back to the old normal, Morgan Stanley’s Chief U.S. Equity Strategist, Mike Wilson says he is now concerned about the risks that come with the move. “Rather than getting excited about the reopening, we are getting a bit more concerned about execution risk and what’s already priced,” Mike Wilson, Chief Investment Officer and Chief U.S. Equity Strategist for Morgan Stanley said in a podcast. Morgan Stanley has downgraded small-caps and consumer discretionary stocks while recommending a move up on the quality curve.
Mike Wilson said that the US economy could now be facing a supply problem and labour shortage, while also being cautious of demand. Although the shortage in supply shortage is limited to certain materials, it could still damage the recovery. “This time not only are retail sales growth, but they’re growing at rates we have never witnessed before. In fact, on a cumulative basis, retail sales are above where they would have been had we just stayed on the same uptrend pre-COVID,” he said.
Stepping into the post-pandemic world, Wilson questions if there will be a demand slowdown as people get on with the normal lives. For firms that were purely beneficiaries of the work from trend, Morgan Stanley’s Chief Investment Officer does see a demand reduction. He adds that there are obvious candidates where a reduction in demand will be seen and expects more to be added to that list.
Savings have increased during the lockdown phase of the pandemic and many argue that savings will eventually be spent. But Mike Wilson has a contradictory view. “Just because people have savings doesn’t mean they’re going to go out and buy more stuff than they already have. Bottom line, we think this is another underappreciated risk we have not previously discussed,” he added. Wilson adds that travel and leisure activity are pockets where spending may increase after a year of curbs.
Currently, markets are flooded with liquidity and benchmark indices are scaling fresh highs but valuations suggest the risk is elevated. Mike Wilson further added that the equity risk premium is very much underpricing risks such as peak rate of change in fundamentals as well as policy and liquidity, cost and margin pressures, equity supply, and extreme investor leverage. “Given that stocks are discounting machines, that means it’s often better to travel than arrive from an investment perspective. As a result, we think it’s time to reduce equity risk until either these risks are better reflected in earnings expectations, price, or both,” he said.