The US investment bank Morgan Stanley has fired a warning to investors to avoid buying US stocks in 2022, and instead invest in European and Asian assets. This is because of ongoing fears regarding inflation along with expectations that the next economic cycle would be ‘hotter, faster’.
Morgan Stanley’s strategic team delivered a sobering 2022 preview that suggested next year would be about ‘mid-to-late cycle’ challenges which could see indices like the S&P 500 performing relatively poorly as well as difficulties for US Treasurys. The preview predicted that the S&P would end 2022 some 6% below its current level.
The US stock market is currently experiencing high valuations and with the outlook predicting the gradual removal of financial support, investors have been advised to look elsewhere. As such, everything from European and Japanese equities to foreign currencies like the Canadian dollar, Swiss franc and Norwegian krone are being preferred to US stocks. Other 2022 recommendations from Morgan Stanley include investing in energy like Brent crude rather than metals such as gold.
Inflationary pressures to hit US markets
It’s a sobering reminder that the US economy still has some way to go before it rebounds from the pandemic. While US growth figures are improving, the inflationary pressures are being felt in the US far more intensely than in European and Japanese markets.
The fact that inflation will be higher than recent levels will mean the successes of 2021 could quickly come to pass as the new year begins. The past 12 months have seen a wave of selloffs in bonds as well as equity gains, but Morgan Stanley’s report mirrors that of Goldman Sachs in suggesting that high-risk assets could provide less impressive returns throughout 2022.
The maturing economic cycle will be hit by global inflation that is expected to reach its peak towards the end of the year. While inflation levels are hoped to even out in 2022, it remains to be seen how factors like retail spend and investment could affect US stocks. If inflationary measures are successful and other factors like the supply chain crisis are overcome, then next year could be better than the most pessimistic reports.
Much will depend on how US monetary policy reacts in the upcoming weeks. Expectations from Morgan Stanley are that the Federal Reserve won’t raise interest rates for the next 12 months. This could mean that the US dollar enters a period of relative weakness after what is expected to be a strong start to 2022.
As such, investors could look back on this fall as being the last gasp of high market returns. With record gains recorded across the US market, it has proven to be a welcome return to strength after the ravages of the Covid-19 pandemic. Plus with rising job rates and the return of key sectors such as the hospitality and tourism industries, it was hoped that the US economy was over the worst. But with the spectre of inflation hanging overhead, it could be a critical few months for US markets.