Three weeks ago Morgan Stanley did something unthinkable: it admitted the truth that in this centrally-planned “bizarro world” its “Advice Has Been Horrendous” explaining this revelation as follows: “for those who follow our portfolio, we did quite well over the five years from 2011-2015. But, our portfolio just had its worst month in 61 months in January, and things have not improved in February. The market is down more than we thought it would be. Our biggest sector bet has been financials (particularly credit cards). As an investor recently said to us at a conference, “I am doing a lot of things, just nothing with confidence”. Doing the opposite of what we recommended would have been better. Bizarro World. Or at least hopefully not the real world.”
Condolences: when central banks managed to push markets higher, nobody complained, but now that things have… changed, everyone is suddenly utterly confused.
Today Morgan Stanley’s equity strategist Adam Parker follows up with “When You Think of Something, Do the Opposite.” This is what he says:
Risk management isn’t easy. Some investors we talk to do it extremely quantitatively, some investors do it in their head. Neither seems to be that successful lately. The new consensus market outlook is that we will chop around a lot, but end up nowhere over the next year. That’s assuredly an upgrade from where sentiment was on February 11, the market lows. It’s amazing how higher prices themselves so dramatically alter the consensus outlook.
Actually it’s not amazing at all: it is very well known to central bankers the world throughout. Parker goes on:
Today’s consensus seems to be that the market goes up and down mid-to-high single digit increments in short but pretty volatile spurts, and ultimately ends up relatively flat six to 12 months from now. That means that we should feel worse now than we did a few weeks ago – not better, because the underlying fundamentals haven’t really moved that much but the market has. On top of this perception of a choppy market headed to nowhere, the consensus is also that the probability of the bear case is greater than the probability of the bull case, meaning the probability of a downward slope to this choppy range is material. This is even more of a reason to be a bit more cautious than a few weeks ago. Yet, sentiment is clearly more positive. People are asking if they should take more risk now, but they were more negative last month. If the consensus is right that we will chop up and down – and we have some sympathy for this sentiment – then by the time we feel a little better, we should take off risk, not add some. Maybe you should do the opposite of what you think you should do. That’s the new risk management.
What is most ironic is that Parker appears to not have taken his own advice, and as he says “We are recommending that investors overweight utilities, health care, financials, and discretionary and underweight technology, staples, and energy.”
Of course, those who have been short energy since the bank’s earlier “epiphany” have been carted out feet first, as MS also admits: “Year-to-date, our portfolio has underperformed its benchmark by 240bps”
