Morgan Stanley, one of the top five banks in the U.S., has raised the probability of a recession hitting the world economy within the next year from 20% to 30% and warned that the S&P 500 over the next year will grow a mere 1.5% from its current level.
“While we don’t believe that a global recession is likely this year, the declining impact of lower oil prices and easier monetary policy on growth starts to worry us,” Morgan Stanley economists led by Elga Bartsch in a report sent on Monday. (Source: “Morgan Stanley sees 30% risk of world recession,” CNBC, March 14, 2016.)
Morgan Stanley ascribed the downgrade to a slowdown in developed market growth led by the U.S.
It now forecasts that U.S. economic growth will decelerate to 1.7% this year and 1.6% next year, from 2.4% last year. It expects the eurozone to grow by 1.5%, down from 1.8%, and cut the outlook for emerging-market economies from 4.4% to four percent.
Overall, global growth is forecast to hit just three percent this year, down from Morgan Stanley’s earlier estimate of 3.3%, with advanced world growth falling to 1.5%.
Morgan Stanley also expects the European Central Bank (ECB) to end the year with a -0.5% deposit rate and the Bank of Japan to carry out another 20-basis-point cut to its already negative rate by July. (Source: “Global recession risk rises to 30pc this year, warn Morgan Stanley,” The Telegraph, March 14, 2016; http://www.telegraph.co.uk/business/2016/03/14/risk-of-fresh-global-recession-rises-to-30pc-this-year-warn-morg/.)
The investment bank said a “low growth environment” had made the world vulnerable to a litany of shocks, including fears that central banks have lost control over domestic financial conditions, while rising political risks from Europe to the Middle East threaten to overwhelm governments. (Source: Ibid.)
Morgan Stanley economists believe that while oil prices are stabilizing, they’re still rather weak, and other data points, like the Manufacturing Purchasing Managers’ Index and global trade, remain close to recession levels.
As a result, Morgan Stanley warns that monetary stimulus will probably become less and less effective, adding that policy and structural reform will become even more important because of this. (Source: “Global Recession Risk Moves Higher, Says Morgan Stanley,” ValueWalk, March 15, 2016; http://www.valuewalk.com/2016/03/global-recession-risk-morgan-stanley/.)
On stocks, Morgan Stanley slashed its 12-month target for the S&P 500 index from 2,175 to 2,050. The gauge was revolving around 2,011 on Wednesday. It’s down 1.6% so far this year. (Source: “Morgan Stanley cuts S&P 500 target as recession fears rise,” MarketWatch, March 15, 2016.)
The bank also cuts it target price for the MSCI Europe index from 1,500 to 1,300 and lowered the MSCI Emerging Markets outlook from 850 to 735.
On a regional basis, Morgan Stanley says it prefers the U.S., where utilities, consumer discretionary, and financials are expected to be the best bet.
“[The] U.S. offers best defense in equity markets—more reliable growth,” the analysts said.
Other big bank strategists also have been dialing back their predictions for U.S. stocks. In February, Credit Suisse said the S&P 500 will finish 2016 at 2,050, after previously forecasting the benchmark would close out the year at 2,150. (Source: “Forecasts grow bleaker: S&P will end this year at 2,050, Credit Suisse’s strategist says,” MarketWatch, February 2, 2016; http://www.marketwatch.com/story/forecasts-grow-bleaker-sp-will-end-this-year-at-2050-credit-suisses-strategist-says-2016-02-02.)