In the wake of recent market volatility and sharp price falls, Morgan Stanley warned that the European banking sector “isn’t as attractive as it used to be”. Shares of Deutsche Bank fell on Friday as worries about the stability of European banks continued following the forced takeover of controversial Credit Suisse by its rival UBS. Shares of the German lender retreated for a third straight day and have now lost more than a fifth of their value this month. Morgan Stanley strategists warned that while the banking sector is now cheaper, news of earnings upgrades and expected cash returns could fade or reverse. They also suggest that the cyclical window had closed for European banks and that investors should reduce exposure to the sector. “While we don’t yet know exactly how things will play out for financials from now on, we are confident that the economic outlook has deteriorated and the window for continued good/improving macro data is beginning to close,” said Morgan Stanley strategists. by Graham Secker. “We are reluctant to downgrade the sector here alone as we see room for volatility on both the upside and downside…however, we see further uncertainty ahead and would seek to reduce exposure to a material rally” , the team added. also telling clients that “banks will be volatile up and down – we would sell in rallies.” The report highlights that every cycle of rate hikes over the past 70 years has ended in recession or financial crisis, with the current turmoil proving to be no exception. While financial crises don’t always lead to recessions, the strategists say the odds are unfavorable given recent events, such as tightening credit availability and a sharply inverted yield curve. The spread between the 2-year and 10-year yields reached 110 basis points the day before the Silicon Valley Bank collapse, but is now just 34 basis points. According to Morgan Stanley, this steepening after the bankruptcy of SVB Financial, Silvergate and Signature Bank in the US and the forced takeover of Credit Suisse points to an impending slowdown. Top-down, Morgan Stanley has recommended the following stocks with an overweight rating (a buy equivalent) to navigate this environment with a defensive exposure. Stocks in traditionally defensive sectors, such as healthcare and utilities, are recommended by Morgan Stanley. These include Swisscom, KPN, Novo Nordisk, Ahold and SSE. Citi bank also downgraded the European banking sector. Strategists at the Wall Street bank said investors should focus on technology as the market faces greater tail risks due to credit flow concerns from major lenders. Banking concerns have also affected European equities outperforming their US counterparts. European stocks were previously expected to outperform due to a potential economic slowdown in the US or a Fed-induced sell-off in the S&P 500. Morgan Stanley said, however, that banking sector troubles have shifted this perspective as the outperformance of European banks is closely linked to the wider European market. — CNBC’s Michael Bloom contributed reporting
Morgan Stanley is naming the stock to navigate the current European banking jitters
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