Teun Draaisma, the respected Morgan Stanley strategist, has admitted it is even more difficult than usual at the moment to forecast the future direction of the market, although he suggests the consensus view of a narrow trading range is likely to be wrong.
In his most recent note he upgrades his recommendation on equities from underweight to neutral, but adds:
"We have less conviction than usual on the market direction outlook. None of the aspects that matter to us in deciding on market direction are giving us a clear steer, including... sentiment, valuations and fundamentals. We are keeping an open mind and are waiting for a stronger call.
"The consensus opinion has been consistently two months late, this year. In March, most people talked about insufficient policy responses and Great Depression II. In May, the consensus focused on the mountains of uninvested cash that were going to chase the market higher in the near term. And now the consensus view is that the market will be rangebound and will trade sideways for the next few months.
"In those instances, the consensus proved to be an accurate description of what had happened in the preceding two months, rather than a good forecast. In our view, markets are unlikely to trade sideways in a narrow range, especially when most expect them to do so. Being long volatility may be the best way to play this, currently. We would characterise the consensus as being very macro and short-term focused, with low conviction levels. As a gross generalisation, hedge funds are long and long-onlies are underinvested."
He said his team was not turning outright bullish since there were still plenty of uncertainties related to such things as US housing, European earnings, the European banking systems, Chinese growth and policy action. He adds:
"We would consider turning more positive if we get comfort that the trough in earnings and US house prices is getting closer. We would consider turning more bearish if rates go up by too much, if the growth outlook deteriorates, or if our [indicators] give us an outright sell signal."
So, what to do? Draaisma recommends exploring what he calls "the middle ground." This seems to mean, in terms of markets, Japan and Europe; in terms of sectors, utilities, telecoms and energy; and stocks with reliable growth prospects in an environment of volatile inflation, higher taxes and slower economic growth. Overall, Draaisma thinks investors should focus on the micro rather than the macro, which also throws up opportunities among companies which have changed focus or management, or restructured their business.
