Morgan Stanley says keep faith with V-shaped recovery

Morgan Stanley predicted a V-shaped global economic recovery and advised investors to take 'overweight' positions on global equities and credit as the world emerges from a turbulent 2020.

As Covid-19 infections increase in the US and other major markets the investment bank argued the global recovery was sustainable and would be supported by Covid-19 vaccines and strong policy responses.

The bank predicted economic growth speeding up rapidly towards trend and that global activity would exceed pre-coronavirus levels in the fourth quarter of 2020. Morgan Stanley predicted 6.4% global growth in 2021, higher than consensus of 5.4% growth, based on higher expected risk appetite and a substantial policy stimulus.

Morgan Stanley's chief cross-asset strategist Andrew Sheets said: "2020 was defined by abnormality. We think that 2021. in contrast, will be defined by a return to more normal conditions. This feels odd to write as the global pandemic rages and many lives remain disrupted but we think that it will be true.

"The year ahead should see economic growth recover, control of the virus improve and uncertainty decline … Trust the recovery, keep the faith."

Global equities will deliver strong growth and returns, Sheets said. Earnings per share will increase by 25-30% and total returns will be in double digits at the end of 2021, he said.

Morgan Stanley is overweight on cyclical stocks and underweight on defensive shares. US small-cap companies will outperform big ones, he added. The bank favours high-yield credit over investment grade and leveraged loans over junk bonds.

In Europe, equities look well positioned for 2021 as growth rebounds and policymakers provide support into the recovery, Morgan Stanley said. The bank predicted 11% upside for the MSCI Europe index. UK shares look "very cheap" with 17% upside for the FTSE 100, it said.

"2021 should be a more rewarding year for European equities as the region transitions from a Covid laggard to a vaccine winner," Morgan Stanley's chief European equity strategist, Graham Secker, said. "Near term, we expect a moderate tactical bounce in UK risk assets if and when a Brexit deal is agreed, boosting banks and domestics most."