The stock market is no longer a stock picker's market and the winning strategy is to build positions in the right sectors, says a latest report by investment bank Morgan Stanley.
The inference is based on an analysis of correlation between broader market returns versus Sensex returns, which helps take a call between macro (sector positions) and micro (stock specific).
Morgan Stanley believes whenever the correlation between the broader market and Sensex is high, the market is being influenced by macro and it is time to go stock specific. Similarly, when it is low, the macro influence is absent and overly focused on stock-specific factors and thus it is time to widen sector positions.
“When the correlations are high and rising, it means the macro has wielded undue influence on stocks. Our strategy is to do the opposite, because we argue that at any point in time there are always individual factors driving stock returns,” Morgan Stanley explains the logic behind this contrarian approach.
The investment bank had been advocating a stock-specific approach since February 2012, when this correlation was high and rising.
“This is changing,” says Morgan Stanley as this correlation has been declining since the start of this year.
However, the correlation has not yet reached levels that historically have signified an opportunity to open up sector positions, it adds.
The investment bank, therefore, has just started to ask its clients to widen sector positions.
“At the sector level, stock-picking opportunities persist in utilities, financial, industrials and materials, whereas other sectors are demanding a macro approach,” it says in a report.
Morgan Stanley is overweight consumer discretionary, energy and technology, and underweight staples, healthcare and telecoms.