Morgan Stanley says equities are "crazy cheap"

Global stocks are in the middle of a multi-year bull market that began in March 2009 and will last for at least two more years, Morgan Stanley Smith Barney's investment strategists said on Wednesday. "One of the great investment decisions someone could make today is to be invested in the equity markets, especially in the emerging markets," said Charles Reinhard, Morgan Stanley Smith Barney's global investment strategist at a press briefing on the the firm's 2011 outlook. The S&P 500 Index of large U.S. stocks has gained 79 percent since bottoming in March 2009, but Reinhard said there are still plenty of opportunities for investors. Company profits have grown by about 30 percent this year, and stock prices are "crazy cheap" relative to bonds and cash, he said. "There are great big companies trading like Rembrandts lying on the driveway in a tag sale," added David Darst, Morgan Stanley Smith Barney's Chief Investment Strategist. Investors in the wake of the 2008 financial crisis have poured into the safety of bonds33 and cash, driving yields to paper thin levels.

Meanwhile, economic worries and the May 6 "flash crash" has prompted investors to abandon U.S. stock funds. Morgan Stanley has been positive about stocks since April 2009 and continues to recommend greater exposure to these "risk assets." Reinhard advised investors to look at U.S. companies with exposure to emerging markets such as China. He pointed to the huge projected growth in the middle class in emerging markets and, as a consequence, rapid growth in demand for goods and services such as travel, fashion and food.

There have historically been two "friendly" periods to invest in equities, and investors are currently experiencing both, said Reinhard. One is the period between when the stocks bottom out and when the Federal Reserve begins to tighten monetary policy. The second is the period after U.S. mid-term elections. For the past 15 mid-term elections, the stock market has risen an average of 25 percent between the Sept. 30 before voting and Sept. 30 one year afterward, said Reinhard. "Markets don't like uncertainty and (after elections) some of the bad scenarios fall by the wayside," he said. Reinhard also does not see evidence of any of the conditions that usually kill off bull markets, such as a clear and immediate danger of inflation, irrational exuberance among investors, a looming recession that would hurt profits or overpriced stocks. "Bull markets don't die of old age, they die of assassins," said Reinhard.

Morgan Stanley Chief Investment Officer Jeff Applegate, who kicked off the outlook session, said there is a greater likelihood of a shrinking U.S.federal budget deficit following Republican party gains in last week's mid-term elections. A U.S. presidential commission on Dec. 1 is expected to issue a report on reducing the federal budget deficit. Applegate said the report could provide President Barack Obama ammunition for some unpopular moves, such as raising the retirement age and paring back entitlements. That's important, he said, because public equity valuations tend to rise when public sector debt falls relative to economic output. "I don't think the market has factored that in yet," Applegate said. The next Congress also is more likely to promote free trade and extend the Bush tax cuts, both positive for the U.S. economy, he said.