All rate hike cycles of the past 70 years have ended in recession and/or financial crisis.

This time will be no different, warns Morgan Stanley’s European markets strategic analysis team, led by Graham Secker.

As the house’s figures show, the cycles of rising interest rates since 1950 have caused recessions 80% of the time as well as two financial crises, in 1984 and 1994.

“A week ago we could claim that this observation was theoretical. Now we know it won’t be any different this timeits analysts note Morgan Stanley.

Financial crises do not always lead to recessions (as was seen in 1984, 1987, 1994 and 1998), but the odds do not look good at this time, given the prospect of a significant tightening of credit availability, coupled with the very inverted bond yield curve, they explain.

In this context, Morgan Stanley warns that the latest increase in market and macroeconomic uncertainty is not going to ease soon. Therefore, the house recommends turning to stocks with defensive characteristics as well as securities that offer quality and growth.

Specifically, it upgrades telecommunications to overweight and maintains increased positions in luxury and technology companies.

Despite their downgrades, the outlook for the banks has worsened in the past week, which is why Morgan Stanley advises clients to sell the sector during any meaningful rally in its shares.

European markets’ outperformance against Wall Street is expected to slow in the near term as investors shift away from value stocks and financials.

And at the same time, the house is removing mid- and small-cap stocks from its “buy list” due to the prospect of lower credit availability and intensifying financial risks.

However, Morgan Stanley notes that the scenarios of its forecasts for the course of the European markets remain intact. The company’s central scenario talks about a 10% decline in earnings per share this year and a P/E of 13.3. After the latest drop, the house’s target price based on these estimates is no longer lower than current prices, but on the other hand, it does not foresee any upside.

The bear scenario of Morgan Stanley speaks of a fall of European markets by 15.9% from current levels, while the bull scenario calculates the margins of rise to 16.7%. “A swift resolution of banking concerns combined with limited further rate hikes and better-than-forecast economic resilience could push markets in that direction“, note the analysts, referring to their bull scenario.