Risk Is Back as Morgan Stanley, Goldman Signal Bullish Way Out

(Bloomberg) -- Investors and strategists who shunned risk, from stocks and credit to emerging markets, are cracking the door back open.

From BNP Paribas Wealth Management in Paris to Goldman Sachs Group Inc. in New York, they’re rejecting market signals that developed economies are on the verge of tipping into recession. Bargain prices, emerging compromises on trade, stimulus in China and even Brexit offer potential reasons for cheer.

“The markets have been digesting bad political uncertainties last year and just the end of it will be a relief for all risky assets on a global basis,” Florent Brones, chief investment officer of BNP Paribas Wealth Management, said in an interview with Bloomberg TV. “Fundamentals are still okay, but political uncertainties are weighing on the moment for risky assets. It will not last forever.”

After a year in which almost every asset class ended in the red, investors are caught between hysteria over an oncoming downturn -- as pockets of the U.S. yield-curve invert -- and real-economy evidence to the contrary. The best employment report in 10 months helped soothe nerves on Friday.

“On the fundamentals, we have just a slowdown in terms of economic growth and earnings growth but the markets are pricing in more than that -- they are pricing in a recession,” Brones said. “We think this recession will not occur.”

He reckons beaten-up value stocks and emerging markets are poised to recover as investors stage a tentative return.

‘Room for a Rally’

Goldman Sachs believes investors need to jump on any relief rebound spurred by positive policy or data surprises -- fast.

“If, as we expect, global economies slow but avoid recession in 2019, and U.S. interest rates peak, there should be room for a risk rally,” strategists led by Peter Oppenheimer wrote in a note. “There is a risk that investors who miss any rally could lose out on the bulk of the returns on offer this year.”

Even uber-bears at Morgan Stanley are entertaining a bull case for global risk. Credit strategists at the bank this week lightened up on a long-held underweight recommendation on U.S. corporate bonds, citing the sharp dip in sentiment of late.

Of course, many investors may find it hard to turn their radars to the feel-good vibes, considering the bearish signals that keep ambushing them. Tuesday’s shock drop in German industrial activity at the tail end of 2018 is a warning that Europe is at risk of a recession. A factory reading in China came in at the lowest since May 2017.

Morgan Stanley cross-asset strategists caution that the elements for the uptrend “aren’t yet aligned, but could be by the end of 1Q.” And they’re not ready to put a buy recommendation on risk yet, remaining neutral equities, neutral global rates, underweight credit and overweight cash.

Return of Risk Appetite

All the same, there are plenty of smart investors betting risk appetite will normalize soon enough. Low-volatility stocks, for example, are outperforming while high-yield credit and emerging-market currencies are recovering.

And the flip-side to bets on weaker U.S. growth momentum -- a cheaper dollar -- is helping to ease financial conditions from 2016 highs. Goldman Sachs and Nomura Holdings are both bearish on the currency.

Here’s one bullish playbook laid out by Morgan Stanley:

• Market dramas spur the U.S. administration to compromise on trade and the budget
• The Federal Reserve reiterates its data-dependent stance -- suggesting it will temper its balance-sheet reduction under certain conditions
• A slowdown in U.S. growth is modest, with markets already front-running the real-economy shift
• China continues to ease
• European growth recovers, and the U.K. avoids a no-deal Brexit
• Corporate earnings turn out “OK”

--With assistance from Anna Edwards and Matthew Miller.

To contact the reporter on this story: Cecile Gutscher in London at cgutscher@bloomberg.net

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

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