Morgan Stanley Bear Andrew Sheets Now Sees Bargains Stacking Up

(Bloomberg) -- In the depths of market despair, one of Wall Street’s staunchest bears has some bullish advice.

Andrew Sheets, famous for his skepticism and his lively cartoons, say it’s time to do a little shopping as volatility gauges flash a potential peak in market fear. Morgan Stanley’s London-based head of cross-asset strategy says everything from liquid stocks and credit-default swaps to agency-issued mortgage bonds now look more attractive on the heels of the fresh U.S. monetary stimulus.

“Price matters,” Sheets said in an interview. “We tried really hard to avoid stepping in and buying the dip, but we are at levels now where we do think risk-reward is better even on a temporary basis as we get the additional support from the Fed.”

Sheets concedes the global economy is headed for a rough patch, but says the fastest stock correction in history has brought inflated prices down to earth. Morgan Stanley strategists closed a cautious position in American stocks, and are gradually doing the same for U.S. credit, they said in a note published Sunday.

The moves follow years of Sheets warning against stretched asset valuations, a vulnerable business cycle and investor complacency.

His expectations that the U.S. central bank would unfurl a larger parachute under free-falling markets came good Sunday. The Federal Reserve delivered its second emergency rate cut this month, dropping the target to 0% to 0.25%, while it pledged to boost bond purchases by $700 billion.

“I think it is important to realize that the market has often faced a big, uncertain risk,” he said. “We’ve seen that in the past. Those market declines were long and were sustained and serious, but they weren’t straight lines.”

Even if markets only stabilize temporarily, the strategist’s near-term advice is to add back some exposure in more liquid areas of the market, and to cash in hedges. The guidance echoes that of Credit Suisse Global Chief Investment Officer Michael Strobaek, who said that those who can stomach elevated volatility should begin to build up equity positions.

Whether buying now is tantamount to catching a falling knife remains to be seen. U.S. stocks tumbled by their limits despite the Fed’s policy action to ease financial conditions to stem the fallout from the coronavirus. U.S. benchmark Treasury yields traded at less than 0.8 percentage point.

Sheets is also advising clients to sell equity volatility, betting that the wildest price swings over a decade will settle. He points to historic precedent that volatility peaks before prices trough, like in the aftermath of the financial crisis as well as big sell-offs since 2010.

“It’s very hard for anybody to say they know exactly when the bottom is,” he said. “But I do think that where volatility has moved to, it’s pricing in so much of uncertainty that it’s very attractive risk premium for investors to take.”

--With assistance from Justina Lee.

To contact the reporter on this story: Anchalee Worrachate in London at aworrachate@bloomberg.net

To contact the editors responsible for this story: Sam Potter at spotter33@bloomberg.net, Cecile Gutscher, Sid Verma

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