One of the mysteries of the first two months of the year was the fact that the US economy was absorbing the Federal Reserve’s wave of interest rate hikes without a hiccup. After the events of the past two weeks, that notion can be put to bed. “Every rate hiking cycle of the last 70 years has ended in a recession (80% of the time) and/or a financial crisis (in 1984 and 1994),” says Graham Secker, chief European equity strategist at Morgan Stanley in London. . “A week ago it was possible to argue that this observation was theoretical, now we know it will be no different this time,” he added. Three US His comments came after the banks collapsed, as federal authorities planned to require big banks to deposit $30 billion into First Republic Bank FRC, +9.98% to prevent a fourth bank. Shares of Credit Suisse CSGN, -10.98% have fallen 22% this week on concerns about its survival. Secker noted that financial crises do not always lead to recessions, as evidenced in 1984, 1987, 1994, and 1998. Availability of credit from banks and possibility of material tightening in credit standards following recent events; 2) A deeply inverted yield curve in recent events,” he said. European stocks’ strong performance of the year, before last week, was driven by financials and cyclones. But now, he says, “we believe the economic outlook has deteriorated and the window for continued good/improving macro data is closing.” The firm upgraded the telecom sector to overweight, as it also recommended a “re-engagement with quality and other long-term views”. Banks SX7E, +0.05% will remain volatile, but the firm recommends selling on rallies, overweighting the sector. “It is impossible to determine how much of the underperformance of European banks is due to concerns about the net interest margin outlook versus contagion risks versus lower bond yields and rate expectations,” Sekar said. “We think the latter factor has contributed significantly and hence any rebound here could lead to some upside volatility in banks.” A popular European exchange-traded fund, the Vanguard FTSE Europe ETF VGK, +1.51% , has gained 5% this year, slightly ahead of the 3% gain for the S&P 500 SPX, +1.76% . However, Saker says the bank’s concerns weaken the case for European stocks more than the US. “While we still see merit in European equities from a valuation and earnings perspective relative to global peers, a move away from ‘cyclical value’ and back to ‘defensive/quality growth’ will not be consistent with ongoing European outperformance,” he said.
