Morgan Stanley: China Struggling, Europe Stands To Rebound

Morgan Stanley MS MS-CHEX Index which tracks Chinese economic momentum has, for the first time since March 2009, turned negative. As China slows the private sector is forced to take on more debt in a low rate environment to fund operations:

As for Europe:  “Historically, when the CMTI [Combined Market Timing Indicator] has moved out of “buy”-territory, price returns have typically moderated from 11% over the three months before the event to around 3% over the three months after“.

Therefore Morgan Stanley is expecting 11 percent returns on European Equities.  Simply put, Real MI Growth in Italy ramps up as borrowing costs fall thanks to declining oil prices and ECB's easy monetary policy. This in turn has a driving impact on Italian Real GDP growth lagged 1-year.

WIth that said, Morgan Stanley is bullish Italy’s economy and the team believes “the unloved Italian equity market could surprise on the upside this year”.  The benefits for Europe don’t appear to be coming through with Morgan Stanley's 12-Month Forward P/E estimates. If earnings were expected to grow we’d be seeing a lower forward P/E:

The recent evidence of what a central bank can do to equity asset prices has been clear in Japan and the US.  SO who need earnings when the only thing driving equity asset prices are global central banks?   Now it's Europe's turn to experience the benefits of the ECB's easy monetary policy.