Morgan Stanley offers stark FTSE warning

Investment bankers Morgan Stanley have warned their model predicts a significant “correction” in the equities market, resulting in an estimated 1000 points being wiped out from the FTSE over the next six months.

According to Teun Draaisma, head of the European equities division of Morgan Stanley, excessive liquidity in the equities market means investments are now vulnerable to correction in the order of 14%.

It was also suggested that it could take only a small trigger to cause a chain of events to wipe out equity values, such as a small rate rise from the Bank of Japan.

Morgan Stanley uses three key triggers to issue such a warning, a composite valuation that divides the price earnings ratio of companies by bond yields. Only five such warnings have been issued since 1980 – the last of which came in 2002 prior to the dotcom bubble bursting.

The triggers suggest rate rises and excessive borrowing point to the mid-cycle rally as being over, and while a 14% fall was currently being forecast, Teun Draaisma pointed out that there could be an even more serious loss in equity values, dependent on the circumstances.

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