LONDON Morgan Stanley warned that richly valued European stocks closely geared to economic growth were set for a pull-back as earnings momentum slows and macro tailwinds fade.
The broker cut its ratings on British engineering firm Bodycote (BOY.L) and Swedish firm SKF (SKFb.ST) to "underweight" as part of a broader turn toward a more cautious stance on the region's capital goods sector.
In a report titled "Cyclicals - Time to Leave the Party", Morgan Stanley strategists led by Graham Secker and Matthew Garman, pointed out that valuations of cyclical stocks relative to the broader market were close to a 40-year high.
"...the group looks overbought and expensive as we approach a peak in PMIs and EPS momentum," the strategists said in a note to clients.
They recommended clients add to relatively safer consumer staples stocks.
Some of this shift was already underway in Europe after worries about growing political turmoil in the U.S. sparked a selloff across global stock markets.
(Reporting by Vikram Subhedar; editing by Danilo Masoni)