Why Morgan Stanley wants clients to cut equity exposure?

By Our Corporate Bureau | 07 Jun 2007

In view of the global markets, brokerage house Morgan Stanley, has advised its clients to cut exposure to equities after their valuation indicators indicated a sell.

Three key warning indicators showed a full-harvest sell signal, which in Morgan Stanley parlance, is a very rare occurrence. It has occurred only five times since 1980 and only once since the dotcom bust. It is a very significant event.

One indicator that has been taken into consideration in the report is the ratio derived after dividing the price-equity ratio by the bond deals. According to Morgan Stanley''s preset parameters that indicated a sell.

The others are fundamentals like liquidity, inflation and the kind of weightages that the stocks have on the exchanges, all of which, have shown a sell.

Whenever all three sell indicators have happened in the same time, the next six months have seen the Indices falling by 15 per cent. So, Morgan Stanley believes that the global equities in general, with a few exceptions would correct by around 10-15 per cent over the next six months. In fact, in two earlier instances, the global equities went on to correct by as high as 25 per cent.

There is also a fundamental view to it, which concerns the significant rise in interest rates, which in turn has actually affected the equity markets.

The other reason is that global investors are happy over the current liquidity situation. But investors will be caught short-changed at a later date when fundamentals will come into view; that will happen when the bond yields start correcting and then, the fundamentals will come into play. Then the markets will come back into the race and will start moving up in line with the fundamentals and not because of the liquidity situation.