MS issues a BUY signal for European Equities …

Morgan Stanley issued a “full house buy signal” on European equities, as its four indicators — valuation, capitulation, risk and fundamentals — all indicate to buy.

“The latest elements that pushed us there have been a capitulation among retail investors, purchasing managers and sellside analysts, as measured by record mutual fund outflows, ISM new orders below 40 and analysts revisions collapsing.

The idea is that when these three groups know about the bad news, equity prices are probably already reflecting it,” the strategists said

The investment bank said markets are currently experiencing the worst earnings recession of the last 40 years, and expects a 43% profits pullback to run until the end of 2009.

“But we do believe at 8 times trailing earnings, or 14 times our estimate of end of 2009 trough earnings, the bad news is in the price,” it added.

Morgan Stanley said its model portfolio is currently 5% overweight equities, neutral cash and 5% underweight bonds. Following on from this, Morgan Stanley is overweight telecoms, consumer discretionary and energy stocks, while underweight banks, consumers and staples and industrials.

“This is consistent with our idea that the severe part of the bear market is over, that there is value, but probably no hurry, as there are many short-term risks related to emerging markets, foreign exchange and deleveraging,” it said.

The bank said the more prudent investor might wish to stay in cash and not be overweight equities, but its advice is not to be short or underweight anymore.

Interesting … so markets are well BID this morning

Tags: equities, full house, Morgan Stanley

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