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Morgan Stanley argues American shares are not overvalued
Thursday 13 Apr 2017 Author: Tom Sieber

Investment bank Morgan Stanley says there is still mileage in buying US shares despite headline indices such as the S&P 500 and Dow Jones Industrial Average trading close to record highs.

The bank’s equity strategy team believe the cyclical upturn which began a year ago has less to do with the election of President Trump than it did with a bottoming out of the global business cycle.

In their view ‘Trump simply “turbocharged” the cycle and stoked animal spirits on Wall Street and Main Street, with tangible effects on the real economy and markets’.

Citing Sir John Templeton’s four stages of the investment cycle which argues bull markets are ‘born in pessimism, grow in scepticism, mature in optimism and die in euphoria’, they add that the end of the cycle is often the best opportunity for investors.
‘Think 1999 or 2006-07. In a low-return world, investors cannot afford to miss it.’

Big News Morgan Stanley chart

Not too pricey

Instead of using a price to earnings ratio, the team believe the equity risk premium (ERP) – which essentially reveals the level of compensation an investor receives for buying stocks rather than keeping their money in safer assets like cash or bonds – is a better measure.

It notes ERPs have been exceptionally elevated but should now normalise. This implies further increases for US equities, underpinning its predicted advance in the S&P 500 from the current 2,357 to 2,700 over the next 12 months.

Traditionally different sectors perform well at different points in the cycle and Morgan Stanley is ‘overweight’ on financials, industrials, energy and IT and ‘underweight’ real estate, telecoms and consumer staples.

It also prefers small and mid-cap stocks. UK investors can gain exposure to US markets through exchange-traded funds such as SPDR Russell 2000 US Small Cap (R2US) and traditional funds with a US small cap focus like Aberdeen Global – North American Smaller Companies (LU0566484027) and CF Miton US Opportunities (GB00B8278F56). (TS)

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