Morgan Stanley's pessimistic outlook on the S&P 500 has diverged from more optimistic forecasts provided by other financial institutions. Led by Andrew Sheets, the bank's strategists predict a significant drop of 16% in earnings per share for the S&P 500 this year,
per Bloomberg, quoted on Yahoo.
This projection stands out as one of the most bearish among those tracked by Bloomberg. According to a note published by Morgan Stanley analysts, they believe that the downside risks to U.S. earnings are imminent, which could result in a market crash.
Morgan Stanley is bullish on equities in Japan, Taiwan and South Korea and suggest an overweight position in developed-market government bonds, including long-dated Treasuries, and the dollar.
Other recommendations from the bank’s strategists include defensive stocks, developed-market investment-grade bonds, and for yield-seeking investors a preference for additional tier-one securities — a type of subordinated bank debt — over high-yield bonds.
Against this backdrop, below we highlight a few ETFs that follow Morgan Stanley’s suggestions.
ETFs to Buy If You Are Following Morgan Stanley Japan – WisdomTree Japan Hedged Equity ETF ( DXJ Quick Quote DXJ - Free Report)
Japan's Nikkei benchmark index has rallied to its highest point since July 1990. A strong earnings season, views that the Bank of Japan will maintain its stimulus longer, and the economy showing signs of a post-COVID consumption rebound all underpin the optimism (read:
Japan's Stocks Soar: New Investing Dawn or Echo of Bubble Era?).
Japan ETFs hold cheaper valuation. Even after rallying hard in the past one year, Japan ETFs are available at much cheaper valuation than that of U.S. stocks and ETFs.
Taiwan – iShares MSCI Taiwan ETF ( EWT Quick Quote EWT - Free Report)
Taiwan Stock Market increased 18.56% since the beginning of 2023. A recovery in the semiconductor industry, especially given the AI boom, led to the rally. Chances are high that such rally will continue in the coming days. Notably, Taiwan Semiconductor makes up about 23% of the fund, followed by Hon Hao Precision (4.54%). In fact, Information Technology sector makes up about 60% of the fund, giving the fund a chance to rally in the near term.
Moreover, interest rates are quite low in Taiwan compared with United States. The central bank of Taiwan raised its key rediscount rate by 12.5bps to 1.875% on March 23rd 2023.
South Korea – iShares MSCI South Korea ETF ( EWY Quick Quote EWY - Free Report)
The Bank of Korea maintained its base rate at 3.5% during its May meeting, as widely expected, holding rates for the third straight time as inflation appears to be slowing amid an economic slowdown. South Korea’s economy expanded 0.3% sequentially in the first quarter of 2023, following a downwardly revised 0.3% shrinkage in the previous period. The semiconductor rally is also a tailwind for the fund. The fund EWY added 15.3% this year.
Defensive Stocks – Invesco Defensive Equity ETF
Some sectors tend to perform better than others in a struggling economy and market, because they provide essential goods and services that people need regardless of the economic conditions. These include sectors such as health care, utilities, consumer staples and telecommunications. These sectors may offer stable income and lower volatility than other sectors.
Developed-Market Government Bonds – iShares International Treasury Bond ETF ( IGOV Quick Quote IGOV - Free Report)
The underlying FTSE World Government Bond Index - Developed Markets Capped comprises of non-U.S. developed market government bonds. The international government bonds appear to benefit as geopolitical tensions are rife, be it in Russia or in China. Government bonds are safer in nature.
Developed-Market Investment-Grade Bonds – iShares iBoxx $ Investment Grade Corporate Bond ETF ( LQD Quick Quote LQD - Free Report)
The underlying Markit iBoxx USD Liquid Investment Grade Index is a rules-based index consisting of liquid, U.S. dollar denominated, investment-grade corporate bonds for sale in the United States. The fund charges 14 bps in fees and yields 3.71% annually. Though not as safe as treasuries, investment-grade corporate bonds too offer quality exposure.