Morgan Stanley: Don’t Believe Market Hype Over Trump and Le Pen

Trumponomics may promise more than it delivers, says Morgan Stanley, while investors steering clear of Europe may find it delivering more than it promises.

The dollar’s surge to 14-year highs against the euro, while the S&P 500 Index scales new records, shows traders are underestimating the risk that Donald Trump will adopt more protectionist policies if U.S. economic growth fails to live up to his campaign pledges, according to Morgan Stanley’s head of cross-asset strategy Andrew Sheets.

“Most investors have assumed a base case that is Trump doing some of the friendly things and none of the unfriendly things,” said Sheets, who recommends buying European and Japanese stocks on expectations they will beat American equities in 2017.

Sheets sees the MSCI Europe Index gaining 6% next year, while the S&P 500 will plateau at 2,300, about 1.3% higher than current levels. The outperformance will be driven by improvements in European corporate earnings and the likelihood that populist candidates won’t prevail in German and French elections next year, one of the concerns that’s clouding the outlook for the region’s assets.

Even if Trump deploys fiscal stimulus and avoids large-scale protectionism as predicted in Sheets’s base case, economic growth could still disappoint. Gross domestic product will expand by 2% in 2017 and 2018, according to Morgan Stanley’s predictions, below the median estimate of economists surveyed by Bloomberg.