Six years in which equity markets performed better than the real economy could be about to reverse, according to analysts at US investment bank Morgan Stanley.
Consumer data in the US and Europe remains resilient, industrial activity is mixed but shows signs of stabilisation and banks face earnings rather than existential headwinds, according to a sector-wide analysis of corporate conditions.
?We continue to believe the current situation is a stock market recession rather than an economic recession,? write analysts Matthew Garman and Graham Secker.
?It is too early to say whether this view is overly optimistic but it does highlight our opinion that the ongoing fall in equity markets is not just about economic fears but also reflects broader macro and financial uncertainties
?In our 2016 outlook report we made the case that after six years of asset markets outperforming the real economy, a reversal in this pattern was likely as the policy-making backdrop became less conducive to asset prices in general.
?At the same time, the profit outlook for European companies continues to look bleak, with this year likely to be the sixth in a row when aggregate earnings per share for MSCI Europe fails to grow.?
Over the last six months equities have undershot economic trends. However, ?given equities forward-looking characteristics we cannot take too much comfort? from that fact, Garman and Secker argue.
?It is likely that economic data moderates further in coming months but we think it is too early to assume that an economic recession is the base case this year.?
Among the UK stocks which could benefit if economic conditions in Europe stabilise include growth-sensitive options like TV broadcaster ITV (ITV) and International Consolidated Airlines (IAG), according to Morgan Stanley?s analysis.
