(Bloomberg) -- Investors may be too complacent about upcoming risks to markets over the next couple of months, according to strategists from Morgan Stanley (NYSE:MS), RBC Capital Markets and Societe Generale (OTC:SCGLY) SA.
As a run of positive catalysts comes to an end -- including improved clarity from earnings season, a new European Union recovery fund and the possibility of further U.S. fiscal stimulus -- the favorable environment for risk assets is expected to change, Morgan Stanley strategists led by Andrew Sheets wrote in a note Friday.
The team suggested investors reduce exposure for the August-September “danger zone” when seasonality worsens for equities and credit, the U.S. presidential election comes into focus and an “exceptional” period of positive economic surprises likely moderates.
“Over the next two months, positive catalysts fade, seasonality gets worse and near-term risks emerge,” they wrote. They recommended investors consider raising cash balances and buying credit-default-swap index protection in the bond market. They also suggested looking at European assets which are more likely to outperform.
Risk assets have proved resilient even amid the ongoing uncertainty of the impact from Covid-19 on economies and public health, as global policy makers stepped in with unprecedented fiscal and monetary support. An MSCI gauge of global stocks has gained about 43% since its March low, and the ICE (NYSE:ICE) BofA MOVE Index -- a measure of volatility in the Treasuries market -- closed on Friday at its lowest since March 2019.
RBC Capital Markets derivatives strategist Amy Wu Silverman agrees that markets could become more volatile into August, at least in the U.S., according to a July 19 note. Risks include less-supportive fiscal stimulus than previously expected and Congressional wrangling around coronavirus aid packages -- with a tail risk that partisan disagreements prevent passage of another package entirely -- she said.
“August could be bumpy,” she said. “I think short-term volatility will rise.”
Meanwhile, investors concerned about any return of volatility should consider haven assets such as the yen and Swiss francs, according to Societe Generale’s chief FX strategist, Kit Juckes.
“After a spectacular spring for risk assets, this year even more than most, we recommend applying plenty of protection,” he wrote Monday. “Don’t forget the sunscreen, something to cover your face, some yen, some Swiss francs and some EUR/USD volatility, which may come in handy if things get a bit lively.”
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