Morgan Stanley Quants Map Out Trades for Turmoil Then Turnaround
Morgan Stanley Quants Map Out Trades for Turmoil Then Turnaround
(Bloomberg) -- Few Wall Street banks have the conviction to say markets are either destined for another rout or a sustained revival. Quantitative strategists at Morgan Stanley are giving clients a game plan for both.
The bank’s systematic specialists reckon trading patterns will remain locked in the current volatility stage for a while yet, favoring quality equities to help weather price swings and protect from downward spikes.
When stage two arrives, a recovery, rules-based investors should look to ride trend-following strategies that outperform in decisive uptrends, quants including Stephan Kessler wrote in a note on Monday.
“In the near future, we expect to stay in the first stage,” they said. “But eventually, markets will move to the second stage which is marked by a recovery as the damage from the coronavirus starts to diminish, with monetary policy remaining highly accommodative and fiscal policy continuing to be supportive.”
Wall Street banks are so far divided over whether global markets have found a bottom amid the economic shutdown caused by the coronavirus and the subsequent unprecedented stimulus.
For the time being investors should look to the same quality stocks that have outperformed in this year’s sell-off as well as deploy trend following in defensive shares, Morgan Stanley said.
Virus disruption has also produced the widest dispersion of commodity returns in two decades, by the team’s calculations. Investors should consider making pair trades, buying the cheaper and shorting the dearer of two materials that are linked to the same economic fundamentals, the strategists wrote.
Once a bottom is found, Kessler and co. argue supportive fiscal and monetary policy should benefit volatility carry trades as market fluctuations ease, while a pure trend-following strategy is “well suited” for a recovery environment.
Relative value trades within credit should also outperform, they said, including shorter-dated debt that should benefit as the yield curve steepens.
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