Subprime crisis: Contagion or contained?

太空飞人

Subprime crisis: Contagion or contained?

·          Subprime losses spread like wild fire. Losses in the fast-unravelling subprime mortgage segment have sent shockwaves across the globe. Investorsâ

太空飞人

Morgan Stanley flashes the 'all-clear'

By Ambrose Evans-Pritchard

Last Updated: 12:10am BST 14/08/2007


Morgan Stanley has advised clients to load up the shopping cart with equities once again, judging that the dramatic sell-off across world bourses over the last two weeks has purged recent excesses and driven many stocks below fair value.

  
Morgan Stanley said its complex model was now starting to flash an all-clear sign
The bank's European team, which issued a "triple sell signal" at the exact top of the market in early June, said its complex model was now starting to flash an all-clear sign for investors.

"This is still a bull market and we see no recession in sight," said Teun Draaisma, chief European equity strategist.

"Sure, there are risks, and we may be too early. The financial risks won't go away overnight. We do not know who owns what financial vehicle and who sits on how big a loss. But one has to buy at the moment of maximum uncertainty, and in our judgment now is close to such a moment," he said.

Mr Draaisma said "sovereign wealth funds"-huge state-owned investment vehicles in China, Russia, and the oil exporting countries with $2,000bn (£994bn) in assets -were sitting on large amounts of cash ready to buy equities.


Overall, company finances remain strong. Inflation has not yet become a major problem. "The risk-reward of buying equities is much better than a few months ago, " he said.

After a 9.5pc drop in the MSCI Europe index since early June - mirrored by falls on Wall Street - the bank's Composite Valuation Indicator has come down far enough to trigger a buy signal. The three phases of "complacency, caution, and capitulation," have run their course, with investor fear now dousing the frothy over-confidence seen over the early summer when risk appetite reached speculative extremes.

Morgan Stanley has begun to buy financial stocks such as CS Group, AXA, and Swedbank on the grounds that they have been the most shunned in the latest panic. It forecasts a 17.5pc rise in the MSCI Europe index of equities over the next year.

Goldman Sachs remains cautious, warning the turmoil may continue a while longer as investors wait to learn if there are further victims from the sub-prime crisis and its spill-over into the broader credit markets.

"Today's environment bears unnerving similarities with 1998, when the global financial system was rocked by the Russian default and the implosion of Long Term Capital Management," said Peter Berezin, a investment strategist at the bank.

"It would be a mistake to be complacent. Just as market participants in late 1997 and early 1998 were too quick to overlook problems in Asia, we are not inclined to be cavalier about risks associated with the current episode of deleveraging," he said.

Goldman Sachs said the emerging markets had so far proved remarkably resilient and may help keep global growth going long enough to nurse the US through its housing slump. Prospects were good that this would prove to be no more than a passing storm. "In the end, despite all the turmoil, 1998 proved to be a terrific buying opportunity," he said.

Simon Derrick, currency chief at the Bank of New York Mellon, warned investors to tread carefully before jumping back in.

"Events of this magnitude rarely play out quickly. It would be wise to wait until we know whether all the bad news is out of the way," he said.