Morgan Stanley Sees U.S. Underperforming in 2020 Across Markets

Morgan Stanley (MS.US) predicted that American equities and corporate bonds will underperform peers next year, while the dollar weakens as growth outside the U.S. picks up.

The Wall Street bank sees a modest decline in the S&P 500 Index by the end of next year, to 3,000 from 3,120 at last week’s close. American shares have been global leaders this year, though closely followed by European ones as both markets benefited from central banks starting another monetary easing cycle.

That was a cycle Morgan Stanley miscalculated a year ago, when the bank’s strategists were “neutral” on equities relative to a benchmark allocation. The MSCI AC World Index is currently sitting on a 22% total return for 2019 so far.

“We see the biggest potential upside in markets with a clearer path to achievable earnings growth (Japan and EM) or scope for some multiple re-rating on falling political risks (Europe),” strategists including Andrew Sheets, Michael Wilson and Matthew Hornbach wrote in a yearly outlook dated Nov. 17, with regard to stocks.

Challenges for the U.S. next year range from the risk that corporate earnings have peaked, high relative valuations on shares and “unique” political risk in the run-up to the presidential election.

The bank still saw potential for a rebound in the dollar against currencies tied to the growth cycle in the second half of 2020, as the presidential election may make the risk environment “more challenging.” Havens like the yen and Swiss franc could also do well, the bank said.

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