Morgan Stanley downgrades global stocks despite perceived easing of Fed monetary policy

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U.S. multinational investment bank Morgan Stanley has downgraded global stocks, arguing that the benefits of a perceived easing of monetary policy by the Federal Reserve will be offset by weaker economic growth.

"Our concern is that the positives of easier policy will be offset by the negatives of weaker growth," Morgan Stanley's chief cross-asset strategist Andrew Sheets was quoted by U.S. media as saying in a note to clients on Sunday.

"We think a repeated lesson for stocks over the last 30 years has been that when easier policy collides with weaker growth, the latter usually matters more for returns," argued the strategist, who cut his rating on global stocks from neutral to underweight, and to the lowest level in five years.

"The most straightforward reason for this shift is simple -- we project poor returns," Sheets explained in the note, adding that over the next 12 months, there is now just 1 percent average upside to Morgan Stanley's price targets for the S&P 500, MSCI Europe, MSCI EM and Topix Japan.

"As markets have rallied over the last month, global trade and PMI data have continued to worsen. Global inflation expectations, commodity prices and long-end yields suggest little optimism about a growth recovery," Sheets added.

Sheets' reminder to investors came as market expectation for a deep Fed rate cut this month faded amid a rebound in June job gains.

The addition of 224,000 jobs in June plus the unemployment rate remaining at a low level of 3.7 percent is believed to lessen the case for a big rate cut by the Fed when it convenes its policy meeting on July 30-31.

As regards corporate earnings, Morgan Stanley doesn't expect them to help boost the stock market either.

"The market is underpricing the risk that companies lower full-year guidance," wrote Sheets, who cautioned that second-quarter earnings, which companies are scheduled to report starting this week, could prove painful for investors.

The strategist wrote that Morgan Stanley's favorite asset class remains emerging market fixed income.

Morgan Stanley's Business Conditions Index recorded the steepest one-month fall in June to a level of 13, down 32 points from May. It is also the lowest level since December 2008.

The firm's economist, Ellen Zentner, told clients in a note that the decline "shows a sharp deterioration in sentiment this month that was broad-based across sectors," according to a June 13 report by CNBC.

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