Enjoy the bull while you can. According to Morgan Stanley euro analyst Teun Draaisma, we've got a little more rally left, and then a long, low multi-year grind as moneys starts to get tight.

The tightening phase may start in the next quarter

or two. We believe investors need increasingly to

consider the implications of monetary and fiscal stimulus

withdrawal. We expect the first Fed rate hike in

mid-2010, but the tightening turning point could come

sooner, for instance through higher oil. Our portfolio is

already quite well positioned for this next phase, and we

provide a ‘tightening checklist’ to decide when to

position fully for it. The Fed language change ahead of

the first hike, or a market timing sell signal, would

indicate the start of that next phase, for us.

Lessons from past tightening cycles. The start of

tightening phases tends to lead to some indigestion and

a defensive rotation in equity markets, for two quarters

or more. The 1994 and 2004 episodes led to a 16% and

8% fall in MSCI Europe over eight and five months.

Sector performance was defensive, but Oil and

Materials outperformed, too. In the aftermath of secular

bear markets tightening phases have been more severe,

with equities falling on average 25% over 13 months.



Source: Morgan Stanley Research



