Five highlights of 2022 global investment outlook, fundamentals to dominate – Morgan Stanley

Morgan Stanley strategists say the easy returns are over for US equities, credits and Treasuries, but see value in European and Japanese stocks in 2022. Here are five highlights of the 2022 global investment outlook.

Time to lighten up on US stocks?

“The S&P 500 index could decline 5% in 2022 while other developed markets could end the year higher. We recommend underweighting US stocks to account for high valuations and more catch-up potential and less volatility elsewhere in the world.”

European and Japanese stocks are calling

“In Japan, equities continue to deliver improving returns on equity, while economic stimulus, business reopenings and strong global capex all suggest that Japan’s stock market could appreciate 12% next year. Meanwhile, the MSCI Europe index has enjoyed its best period of relative outperformance in 20 years compared to the rest of the world, and that pattern should continue thanks to increased mergers and acquisitions, buyback activity and changes in investor positioning since many global portfolios had been underexposed to the region.”

Stock selection could matter more than style and sector

“We believe health care, financials and secular technology companies could see upside in the year ahead. Consumer goods and cyclical technology stocks could lag as supply and demand dynamics settle into a more normal pattern.”

Government bonds are all over the map

“We recommend underweighting US Treasuries in expectation of the 10-year Treasury moving past 2% by the end of 2022. Local emerging market debt is starting to look interesting but investors should be patient. With expectations that the US dollar and real yields rise to start the year, investors will get a better entry point later in the year.”

In commodities, oil springs ahead

“Metals may lose their luster as high real yields weigh on gold, while copper and zinc soften with better supply. Aluminum remains a top pick for the strategists, who point to cyclical and structural factors. Within commodities, oil offers the best combination of valuations and fundamentals. We believe oil could top $90 a barrel in 2022 as rising demand meets relatively spare capacity.”