Morgan Stanley and Wells Fargo Say Great Stock Rotation Has Legs
Comment of the Day

January 05 2022

Commentary by Eoin Treacy

Morgan Stanley and Wells Fargo Say Great Stock Rotation Has Legs

This article from Bloomberg may be of interest to subscribers. Here is a section:

“If we do see real yields improve, it’s going to be a much more difficult environment for tech,” Christopher Harvey, head of equity strategy at Wells Fargo said. “Especially for ‘growth at any price’ stocks. The place where you should see this is your high, high growth and your high-multiple stocks.”

Wells Fargo strategists see more bad news in store for tech and expensive growth stocks this year with room for real rates to rise another 25 to 50 basis points. 

Rising real rates are seen as an optimistic signal about the state of the economy, even if they send a gloomy one about stocks that were the big winners of pandemic lockdowns. The flipside is cyclical stocks such as big banks, industrial and transport firms are in line for gains. 

Tech stocks -- often prized for their long-term prospects -- have become especially sensitive to bond swings as higher rates mean their future profits are worth less at present.

“What struck me about yesterday’s selloff that was so important was that the bulk of the price action occurred in real yields, not in breakevens,” BMO Capital Markets strategist Ian Lyngen said Tuesday on Bloomberg TV. “So this is a growth story and not an inflation one at this point.”

Eoin Treacy's view

David and I created the Autonomies group of companies back in 2012/13. At the time we were thinking about how the market would evolve post the Global Financial Crisis.

It appeared obvious that globalisation, the rise of the global consumer, the shale revolution and abundant liquidity would spur a secular bull market. We believed the best positioned to profit would be big global companies with truly international businesses, with the heft to expand into growth markets.

We focused in on those that dominate their respective niches in compiling the list. We were both also concerned that inflationary pressures would play an increasing role in the decision-making process of global investors. While not focusing on dividends, we opined that betting on strong balance sheets and pricing power would be a sufficient hedge against any inflationary pressures that arose. That also allowed me to include the large technology companies which were leading the market higher.

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