Markets to fall further on growth slowdown: Morgan Stanley

Also read: Europe likely to dominate market as EU Summit approaches

In an interview to CNBC-TV he said that the euro crisis needs to be addressed with more firm decisions on bank deposit guarantees, banking union, fiscal union, and more aggressive monetary policy.

He said, "I think the market reaction to that small bits of good news will be short lived, if macro data continue to disappoint and that for now is our base case. The world is slowing rapidly and unless we get decisive policy action in response to that slowdown. I think equity markets are more likely to fall than rise in one - two month view."

Here is an edited transcript of the edited comments. Also watch the accompanying video.

Q: There has been underperformance across most equities in the last couple of days. Are you getting the sense there is a deeper cut coming?

A: I think the key pressures are on risk assets that are down now, what markets are facing is a global growth slowdown. That is quite different to where we were two to three months ago when we were really focused on euro specific stress point.

We are now seeing the growth risks go global. The developed markets (DMs) and emerging markets (EMs) and as a consequence equity markets are likely to finish the next couple of weeks lower. Particularly as we have seen disappointment from central banks in terms of their response. So, one hand there is a global growth slowdown, on the other hand disappointment about the policy response.

Q: On that policy response you have got a series of Euro meetings culminating in the Euro summit on Thursday. What are you expecting? So you think anything major for stock markets might materialise?

A: We are coming into this summit relatively skeptical. It’s the 19th or 20th EU summi and if summits were going to fix these problems, the Euro would be very healthy by now, clearly its not. We think it will need an even bigger crisis than we have now for the European leadership to take decisive steps. 

Those decisive steps are bank deposit guarantees, banking union, fiscal union, and more aggressive monetary policy, and we really can't see anything important coming out of this summit as a base case. There may be some embroidery but I think the market reaction to that small bits of good news will be short lived, if macro data continue to disappoint and that for now is our base case.

Q: So, tactically how would you be approaching markets now? How would you be positioned in even EMs?

A: I think the risks are certainly still skewed to the downside. This global growth slowdown where the starting point is much closer to recession and contraction than what we saw in comparable growth scares of the past 2 years.

If you take as your benchmark the global PMIs (Purchasing Managers Indices), on average they were around 56-57 at the high points in 2010-2011 and then slowed from those levels. We are slowing from levels of 52-53 which puts us much closer to outright contraction. You are now seeing that echoed in industrial commodity prices with metal prices weak, energy and oil prices falling sharply.

That's telling you the world is slowing and slowing rapidly and unless we get decisive policy action in response to that slowdown. I think equity markets are more likely to fall than rise on one - two month view.

Q: How have you read that fall in energy prices? Do you believe it’s looking like a sustainable and durable crack in commodities, perhaps even the makings of a bear phase for that asset class?

A: What I do think is quite likely is the commodity super cycle which started a decade ago is probably past its peak. But let’s remember what a commodity super cycle is. You still have a lot of month-to-month and year-to-year volatility in that. It’s just that we had 10 years where industrial commodity prices made a sequence of higher highs - higher lows.

I think going forward, the broad commodity indices may have passed their peaks and may trend down, but that doesn’t mean they are always falling. We may now have 4-5 years where commodity prices make a sequence of lower highs - lower lows.

The soft patch, we are in, now reflects the global growth slowdown. Is there the prospect of better commodity prices next year? Perhaps because in a super cycle trend things don't move in one direction. But I think the highs that we saw back in 2008, and on some measures last years highs on industrial commodity prices that may not be surpassed for some time.