Almost four months ago, in early July, Morgan Stanley (MS) analysts took a relatively “rebellious” position regarding the overall investment strategy for the end of 2019 - the beginning of 2020. Then, in accordance with the principle “put money where the mouth is”, MS analysts recommended clients to cut the weight of equities in investment portfolios, buy government bonds equal-weight, and boost holdings of cash. MS's position was relatively different from the moderately optimistic views of investors on the stock market, and as time has shown, being contrarian was an ill-timed intention.

At that time MS highlighted two key concerns for the stock market - weak EPS projections for the third quarter and pressure from inventory, labour costs and trade tensions. However, anticipating more easing from the Fed, the bank misinterpreted its effects on the stock market, largely due to the preventive, corrective nature of the stimulus, not the late reaction, as it was in previous cases.

As a result, the pressure from frustrated clients who missed the opportunity to hop on the S&P 500 train and unrealised risks of a trade war forced bank analysts to throw a white flag.  Revised investment view released on Sunday now rules out a recession in 2020 – world economy will bottom out in the first quarter of 2020 and turn into moderate mini-expansion cycle in next quarters. Importantly, emerging markets will be the drivers of growth, while growth in the US is more likely to stabilise, which is reasonable to formulate in the corresponding underweight of US stocks in the portfolio and greater accent on EM stocks.

Also, comparing with the past mid-cycle slowdown, US stock markets, at this stage, look overvalued, credit spreads look narrow, and volatility is quite low. At the same time, MS analysts emphasise valuation of global equities correspond to their average values ​​at past “inflection points” of global economic growth.

Speaking about the prospects of expansion from the view of defensive assets, most likely we should expect a resumption of bearish in gold in the short term and given improving sentiments and economic background for the classic New Year rally due to the seasonal consumer boom, the likelihood of this outcome is even stronger. It is reasonable to admit that the current valuation of gold still prices in past fears that need to be eliminated. Therefore, the view on gold I cited earlier continues to remain relevant.

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Conceptually, the investment strategy for 2020 should be based on targeting equities of those countries that will benefit most from the mini-expansion cycle – i.e. will grow faster than others. One perspective is to note that the countries that plunged most from the trade war fears will recover faster and easier. According to MS, South Korea and Brazil will “shine” in this sense, where a situation of an early expansion cycle may take shape, with an average EPS forecast of 15%. The United States, according to MS analysts, will have zero or near-zero EPS growth in 2020.

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