High-valued stocks have a row

Morgan Stanley said high-value stocks that have benefited from the low interest rate environment in the past are likely to face a sustained hit in the new year.

Andrew Sheets, chief cross-asset strategist at Morgan Stanley, said that monetary policy is shifting, and there is no certainty that rate action has been completed or priced in, while real yields still have a lot of room to rise.

The stock market has seen a buying rotation this year, with investors abandoning high-value stocks, with the Nasdaq 100 down 4.5% in the first week of the new year. The 10-year real yield hit -0.77%, its highest level since April.

Andrew Sheets expects the 10-year real yield could hit -0.3% this year, well above the current negative 0.83%. While that number is still historically low, the bank believes that relative to value stocks, growth stocks will be more affected, in line with the broader market's lower price-to-earnings ratio.