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"In sum, we think the global bear market is nearing a climactic point and a crack in the commodity complex will be a powerful signal for a reversal of the trends that dominated in the first half of the year," Morgan Stanley said in a quarterly newsletter to its mutual fund unit holders in India.
Elaborating on the importance of oil prices in the global economy, the letter stated that in the first half of 2008, stock markets of most oil exporting countries soared to new highs, while those of oil importers plunged 15 per cent on an average.
"India's further 20 per cent relative under performance was entirely due to its even higher exposure of oil imports," it said.
Interestingly, the report stated that India and Turkey rank near the bottom of the global stocks market league tables this year, as both the countries have extremely large oil import bills, running at nearly five per cent of the GDP.
"They have no other major commodity exports to offset the oil price shock and also have few listed companies that are commodity plays," it added.
Furthermore, the letter said that inflation may not be the crucial factor impacting a fall in the stock markets across the world.
Stocks in commodity exporting economies such as Russia and Nigeria, which have witnessed the most pronounced increase in inflation, could not have held up as well on a relative basis, the report stated.
Morgan Stanley believes that with inflation firmly on the radar screen of almost all central banks, the main risk to the world economy arises from a substantial slowdown in global growth, rather than a further rise in price pressures. The last leg of the bear market is likely to be led by materials and energy stocks declining, as well as by growth expectations dramatically scaling back.
"Independently, the commodity sector and energy stocks in particular, are egregiously overextended in terms of relative price momentum," the letter added.
Globally, the out performance of the energy sector has surpassed the 1970s episode. The only other time one sector was able to pull so far away from the broader market was in early 2000, when tech stocks lorded over the league tables.
Morgan Stanley further said that it is becoming increasingly apparent that global growth is slowing everywhere and a readjustment of growth expectations could mark the final phase of the bear market.
"Sentiment is already very bearish and is getting to a point, where typically major rallies have followed," the report added.
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