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US value and tech stocks among areas of opportunity in 2022 despite Fed tightening, says Morgan Stanley

Stock markets across the globe have been volatile so far in 2022 and with the recent blow, most are trading negative on a year to date basis.

Stock markets across the globe have been volatile so far in 2022 and with the recent blow, most are trading negative on a year to date basis. Andrew Slimmon, Head of Applied Equity Advisors Team, Morgan Stanley believes that the Market activity that has­ transpired year-to-date could be a microcosm of what is to come — a close battle between the positives and negatives. He, however, spots opportunity in pockets such as US value and technology stocks. “Despite lower returns, 2022 should offer more opportunities for tactical alpha generation at the allocation level,” Andrew Slimmon said.

“Investors shouldn’t let the bears scare them out of taking advantage of selloffs, but they also shouldn’t chase gains when there’s a lot of market strength,” the Morgan Stanley equity advisor warned. Andrew Slimmon believes 2022 can be an “ok” year for the market return overall, just not as strong as what we’ve seen in the last few years. Even as the US Federal Reserve gears up for policy tightening, earnings estimates for the S&P 500 for 2021, 2022 and 2023 are higher today than they were at the end of 2021, hinting that overall corporate America’s health is better than earlier thought.

Value stocks prefered

Amid the volatile market condition, Andrew Slimmon says he remains committed to a value bias in the US. He lists two reasons for his bias towards value stocks, the first being the cheap prices of value stocks amid a recession. “After recessions, they tend to trade back to a normalized level. They are not at that level yet,” he said. The second reason for backing value stocks is Slimmon’s belief that the economy could be moving into a period of permanent higher inflation and if it does, inflation-sensitive stocks, which reside in the value bucket, could outperform for an extended period.

Technology stocks

Morgan Stanley analysts are now less negative on growth than we have been, given the magnitude of recent underperformance vs. the broad market. Andrew Slimmon noted that the chase of technology/growth stocks post covid-19 reminded him of the NASDAQ bubble of 2000. “We thought that once the bubble burst, it was going to be ugly, which it has been. However, the more established mega-cap technology stocks never traded to the same frenzied level — that is how the environment today is different than in 2000,” Slimmon added. The recent underperformance of such stocks despite numerous impressive earnings reports makes Andrew Slimmon believe many of these large-cap growth names are now trading at very reasonable valuations.

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