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June 7, 2007    

Morgan Stanley warns of equities market “correction”

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by Elaine Frei
Morgan Stanley warns of equities market "correction"

Investors have been warned by investment bank Morgan Stanley (NYSE: MS) that a “correction” could send equities markets down by as much as 14 percent in the next six months. It compared the predicted sell-off to that of the dotcom collapse at the beginning of the decade and it has advised its clients to reduce their exposure to equities. It was the first time since 2002 that the bank has issued such a warning, and the fifth time since 1980. After the bank issued its report, the FTSE 100 dropped by over 120 points on Wednesday.

Morgan Stanley’s chief of European equities strategy, Teun Draaisma, said that the MSCI Europe Index has fallen by an average of 15.2 percent in the six months after each previous full sell warning was issued. He was quoted as saying that the model used to produce the warning is predicting a 14 percent correction, which would send the FTSE 100 down by more than 1,000 points. The decline could be even greater than that, however, he said.

Mr. Draaisma said that the triggers for the decline could be quite small, such as an interest rate hike from the Bank of Japan or a widening of credit spreads. He warned that the markets always return to fundamental value.

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