Global investment bank Morgan Stanley has shared its view on whether it's a good idea to buy (ASX) shares in this market volatility.
Morgan Stanley's Lisa Shalett, chief investment officer of wealth management, says whilst buying the dip could be an attractive idea, a better approach could be to take a "more nuanced approach".
Ms Shallet said that although share market benchmarks fell in the second half of February 2021 – such as the tech-focused NASDAQ index which dropped 6.4% from the peak in mid-February – Morgan Stanley doesn't think it's a buying opportunity at the moment.
Interest rate expectations
There has been a lot of talk about interest rates in recent weeks. Potential inflation is leading to worries that interest rates are going to rise sooner than expected, even though the RBA governor Dr Lowe has said interest rates probably aren't going to move for three years.
But Morgan Stanley thinks that the interest rate dynamics may mean that market conditions are fundamentally changing.
A key number that investors focus on is the US Treasury 10-year bond yield, which has gone as high as 1.6% in recent times. In August 2020 it went as low as 0.5%.
Indeed, over the last 24 hours the US Treasury 10-year yield went back above 1.5% as the US Federal Reserve boss Jerome Powell mentioned that inflation may temporarily jump higher, according to reporting by CNBC.
Getting back to the views of Morgan Stanley, it noted that the market may be taking action based on the fact the US economy is recovering faster than expected. The investment bank has been increasing its estimates for economic growth.
Morgan Stanley warned that interest rate rises could come sooner if the economy gets back to the growth level of before COVID-19 came along.
So what does this mean?
The investment bank said that growth share valuations have benefited from expectations that ultra low interest rates would persist for longer, supporting "sky-high" price / earnings ratios (p/e ratios).
Ms Shalett explained:
Growth stocks are often valued against the yield on a low-risk Treasury bond—the wider the spread, the larger premium that an investor is expected to pay for the added risk of growth. As rates move higher, stock prices often adjust to reflect that narrowing gap. That may be a big reason why tech stocks, in particular, got hit so hard last week.
Morgan Stanley isn't confident that this level of inflation is temporary.
The investment bank believes there are a few different reasons why inflation could be higher than the Federal Reserve is expecting, which may mean that the Fed has to respond.
What are some of those factors? Morgan Stanley reeled off a list including: "money-supply growth, higher wages and increased fiscal stimulus, against a backdrop of pent-up demand for consumer services".
Ms Shalett said that investors may now be expecting an interest rate rise in early 2023 rather than the end of 2023.
In terms of which ASX shares that Morgan Stanley thinks is a buy, you'll just have to keep an eye on the broker articles that my Fool colleagues and I write about its latest buy recommendations.
