For the Great Rotate we must wait, says Draaisma

Has the time arrived to sell momentum and buy value? Or, more prosaically, has the time arrived to sell energy and mining and buy back into banks?

We’ve been here before, of course. Fidelity’s Anthony Bolton was widely quoted back in May when he said that he thought the worst of the Crunch was over and that at some point it would be sensible to switch from commodities to financials. But to be fair, he did say at the time that the bear market would probably continue through until 2009.

Still, Teun Draaisma’s strategy team at Morgan Stanley stepped up to the plate on Monday:

The momentum sectors are (or are close to being) more expensive than ever, relative to the market, while the value sectors are (or are close to being) cheaper than ever, relative to the market. Our consensus positioning survey shows that investors are long momentum and short value.

There are good reasons for this, the MS man is quick to add: momentum has worked well, and value has not.

But at some point we believe the pendulum will swing back to value. The possible triggers for this are interrelated: when the oil price falls, or when inflation peaks, or when EM slows down meaningfully. We think all may well happen in the next few months, but it won’t pay to be early on this call.

Key to that is in predicting how long the current stagflationary regime will last. Draaisma reckons “a few more months,” with disinflation beyond that. As price rises ease, equity markets should find relief and a pronounced sector rotation could well get underway.

But the MS strategy team are still worried about the downside in the short-term, which could be as large as 40 per cent if we’ve got a repeat of the 1970s on our hands.

For now, it seems, the Great Rotate can wait.

In the meantime, here’s Draaisma depiction of how extreme the current picture has become: