Morgan Stanley’s global director of fixed income research has warned that investors should be stockpiling cash to take advantage of an imminent market correction in stocks and bonds.
Speaking at the TwentyFour Fixed Income Investment Conference, Neil McLeish said there was a “tradable correction” coming up and investors should prepare for it.
He encouraged investors to raise their cash levels to an “above-average level” in order to buy back at cheaper prices after what he predicts will be a short-term dip across markets.
Mr McLeish said his suggestion to raise cash levels should be a “tactical move” solely to buy back in again because the “long-term view is fine”.
To describe the current environment, the strategist recalled the words of an investor at a Morgan Stanley conference back in 2004, when he said “we’re farming the fertile soils on the slopes of the volcano, even though it has already started to smoke”.
He said he did not believe the bull market in both equities and credit that investors have enjoyed for many years now was over yet.
But he saw considerable potential for volatility in both markets because they were “fully valued”, although not yet in “bubble-like” territory.
The spark for a sell-off in both asset classes, according to Mr McLeish, was likely to be a change in sentiment towards risk assets.
Mr McLeish said markets had already witnessed the start of such a sell-off in July when high-yield bonds, particularly in the US, suffered a sharp downturn following comments from Janet Yellen.
The US Federal Reserve chairman had suggested that the valuations and liquidity in the high-yield market were becoming an issue and many investors responded by selling out.
Mr McLeish said the sentiment towards risky assets had become one of “complacence” and that comments such as those from Ms Yellen had the potential to create a “shift in the perception of the liquidity in the US financial markets”.
It is this shift in perception that Mr McLeish has predicted will lead to a sell-off in equities and bonds.
However, he said the long-term drivers for asset price outperformance would still be in place, led by the US, which, in spite of the high returns generated there in recent years, was still in the “expansion” phase of the credit cycle, Mr McLeish said.
But Morgan Stanley’s base-case scenarios for asset price returns show that they favour Japanese and European equities for the best performance in the next year.
The firm’s base-case scenario is for Japan’s Topix index to rise by 18 per cent in the next 12 months, closely followed by the MSCI Europe index, which is projected to rise by 13 per cent.
Most equity markets are projected to rise under Morgan Stanley’s predictions, as are most credit markets, which is why Mr McLeish sees any sell-off as a buying opportunity.
But Morgan Stanley has a negative view on government bonds from across developed markets in the next 12 months, predicting that investors will lose money in all of them.
