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Donald Trump rally could lose steam as inauguration approaches, says Morgan Stanley

Jessica Sier
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American stocks have rocketed since the election of Donald Trump, but it's time investors consider their exit strategies, says Morgan Stanley, suggesting the President-elect's inauguration might be a good time to get out. 

"We are worried that there is an arrogance in telling people they should be worried, but to stay bullish for now," said Morgan Stanley's equity strategist team, lead by Adam Parker, in a note to clients. 

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"Part of us thinks we should just sell the inauguration. After all, what incrementally positive and exciting outcomes could be produced in the first few weeks after that?"

Prior to the US election in November, the bank says it was optimistic on the future of US equities, despite expecting low earnings growth and only some valuation-multiple expansion.

But since confirmation Mr Trump will be at the helm of the world's largest economy, the bank expects "material" earnings growth and multiple contraction. 

The inauguration of the 45th president of the United States will take place on January 20.

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Gleeful but blind?

Since the election, the US rally has been sizeable and has spilled over into global financial markets including the ASX. The Dow Jones industrial average has gained about 9 per cent and has come within a whisker of the 20,000 point mark. The S&P; 500 has jumped about 6 per cent and is bumping up against record highs. 

Locally, investors are again murmuring about the ASX 200 reaching the 6000-point mark as investors tap into the potential global growth theme. 

However, Morgan Stanley seems uncomfortable blindly following the optimistic tone taken by financial markets, given there is little information on which to make investments with conviction. 

"We can't help but think that the Republican sweep has created a more uncertain and volatile outlook for the economy and corporate earnings growth," writes the bank, before pointing to rising interest rates by the US Federal Reserve, China's economic slowdown, a significantly stronger US dollar and the political uncertainty sweeping throughout Europe as causes for concern. 

Morgan Stanley has amended its base-case target for the S&P; 500 at 2300 by the end of 2017, compared with Wednesday's close of 2270. 

Markets have gleefully grabbed on to the prospect of Mr Trump's proposed tax cuts for individuals and companies as well as considerable infrastructure projects that look set to boost government deficit spending. 

The forecasts

Morgan Stanley forecasts the S&P; 500 earnings would be about 18 per cent higher in 2018 than in 2016, that's assuming the corporate tax cut from 35 per cent to 25 per cent materialises. 

"For now, we assume just over 50 per cent of the earnings growth over the next two years will come from a change in corporate taxes," writes the bank. "This is why we say that any tax-related gridlock will be bad for markets."

The bank has reorganised its portfolio to equal-weight industrials from over-weight, saying the rally fuelled by dreams to "rebuild America" had run far enough and it was time to take profits. 

"In the end, one way to view stock investing is the process of buying a little dream today in the hope of selling it to a sucker with a bigger dream later," said the note. 

Morgan Stanley also upgraded energy to overweight from equal-weight, pointing to the potential uptick in the oil sector as prices recover and exploration and production pickup. 

Technology was bumped up to equal weight from underweight, allowing the portfolio exposure to gaming assets and the Morgan Stanley team quip they have done appropriate ground research by investing its time in first-person shooter games. 

"We spent an hour on Call of Duty this break, just to take the usage hours up from 10 billion to 10,000,000,001 this quarter," reads the note. 

The team also reduced its exposure to consumer discretionary plays and while slightly adjusting its financials exposure, they remain equal weight.