First "full house buy" alert since 2009

Morgan Stanley has issued its strongest recommendation on global equities, stating that its market timing indicator (MTI) model is currently pointing to "strong returns" following a round of sell-offs caused by concerns over China.

"We view the recent volatility in equities as a stockmarket event rather than providing an accurate reflection of the economic outlook. This view is supported by the latest forecast changes and commentary from our economists, as well as ongoing macro news flow," says Morgan Stanley.

The bank's MTI model, which looks at five key global economic indicators including valuation, fundamentals and risk, has had notable success in the past. In 2007 it successfully called the top of the market prior to the financial crash, and it also predicted the subsequent rally in 2009.

The bank's call follows another disappointing day for global markets as European and US indices all shed around 3% on Tuesday (1 September) following disappointing manufacturing data from China.

The worst may be over

However, Mike van Dulken, head of research at Accendo Markets, says Morgan Stanley's recommendation suggests that the worst may now be over for global equities.

"Turmoil returned to Wall Street on Tuesday after a short respite, with renewed concerns about China's economy dragging major US indices down and seemingly compounding fears of a long-term sell-off. The S&P 500 is now 10% below its May all-time high.

"However, we wonder whether the prevailing bearishness will continue after Morgan Stanley's full house buy alert on global equities, effectively calling the bottom of this summer's equity rout," says van Dulken.

Morgan Stanley is particularly bullish on European equities, stating that it sees scope for a "strong rebound" in equity valuations following recent sell-offs.

"Potential increases in US rates and EU inflation are generally negative for equity valuations, but we believe they can be offset by the European Central Bank's ongoing quantitative easing programme and the deep relative undervaluation of stocks versus bonds," says the bank.

"Our new forecasts imply an 11% upside from current levels, not including a further 3 to 4% return from dividends."

It adds that banks are its favoured way to access developed European markets, with Italy a "key overweight". However, it says that it is underweight UK equities due to a strong pound and the economy's large exposure to commodities, which are most sensitive to any shift in sentiment towards China.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.