Disruption in 2022! Crude oil to top $90; S&P to slip 5%: Morgan Stanley

For the first time in a decade, commodities outperformed major equity indices and oil stands out as the star performer in the commodity index, gaining over 50% year-to-date. But, if you are perplexed which way ‘black gold’ may move in 2022, then here is a cue from Morgan Stanley, one of the top-notch investment banks globally. Analysts from the investment bank believe that oil could top $90 a barrel in 2022 as rising demand meets relatively spare capacity.

In its 2022 Global Strategy Outlook report, strategists from the firm believe that metals may lose their lustre as high real yields weigh on gold prices, while copper and zinc soften with better supply. Martijn Rats, chief commodity strategist at Morgan Stanley, believes that within commodities, oil offers the best combination of valuations and fundamentals. His team believes that oil could cross $90 a barrel. Currently, NYMEX WTI Crude is trading between $73 and $74 per barrel.

Time to lighten up on U.S. stocks?

As unprecedented fiscal and monetary policy support fades, fundamentals will dominate, opines Andrew Sheets, chief cross-asset strategist for Morgan Stanley Research. Strategist believes that easy returns are over for U.S. equities, credit and treasuries. The firm strategists believe that S&P 500 index could decline 5% in 2022 while other developed markets could end the year higher. They recommend underweighting U.S. stocks to account for high valuations and more catch-up potential elsewhere in the world.

U.S. equities have outperformed other developed markets for much of the last decade on the back of superior and more durable earnings trends, but uncertainties are mounting around cost pressures, supply issues, policy uncertainty and tax changes, says Mike Wilson, chief U.S. equity strategist.

Europe, Japan equities poised to rise

In contrast to U.S. equities, stock markets in Europe and Japan are more reasonably priced and geared toward growth. Firm strategists are overweight on both Europe and Japanese equity markets.

In Japan, equities continue to deliver improving returns on equity, while economic stimulus, business reopening 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 merger and acquisitions, buyback activities and changes in investor positioning since many global portfolios had been underexposed to the region, the report states.

Analysts assumptions from the firm suggest that European stocks can deliver an 8% price return and double-digit total return, says Graham Secker, chief european equity strategist.

Rise of stock selection over style and sector

Morgan Stanley strategists believe healthcare, 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.

Economic and political environment has been permanently altered from its pre-pandemic days, which breeds higher uncertainty and dispersion and makes stock picking more important than ever in the year ahead, says Mike Wilson, Chief US Equity Strategist.

Underweight over U.S. treasuries

Morgan Stanley strategists recommend underweighting U.S. treasuries - particularly those with intermediate maturities in expectation of the 10-year treasury moving past 2% by the end of 2022. They also see agency mortgage backed securities coming under pressure from rich valuations and higher volatility.

In 2022, bond markets will need to make sense of differentiated policies. Some policies, such as in the U.K. and Canada, will be aimed at outright tightening financial conditions while others will attempt to ease financial conditions further, albeit at a slower pace or maintain accommodative financial conditions, says Matthew Hornbach, Global Head of Macro Strategy.