http://ftalphaville.ft.com/blog/2008/03/25/11781/draaisma-stop-fighting-the-fedbuy-quality-credit/ Well, to be precise, Morgan Stanley strategist Teun Draaisma and his team are âturning strategically positive on higher-quality creditâ: There is now deep value in the sector for investors with a medium-term investment horizon. Tactically, risks remain, given the poor outlook for the economic cycle and lingering financial system instability. However, recent Fed action suggests that the funding crisis for higher-quality assets has turned the corner. We now see a good tactical entry point for what is a medium-term deep-value trade. With valuations now fully priced for the current recession - added to the fact that prices have been driven this wide by deleveraging, not just âfundamentalsâ - it is, Draaisma says, time to stop fighting the Fed. After a slow start last year, the Fedâs most recent actions are an aggressive and effective response to the current crisis, in our view. In particular, the Primary Dealer Credit Facility (PDCF) provides a big boost for investment grade assets, which have dramatically underperformed thus far in this bear market. But to be clear here, the MS team are not sounding the all-clear for credit markets in general, while for equity investors the fact that corporate earnings will be seriously disappointing means the bear market in stocks continues - notwithstanding a likely âbear market rallyâ encouraged by the stabilisation of credit. Draaismaâs specific advice: Long investment grade in both the US and Europe, with financials to outperform in the rebound. Corporate super-senior attractive. In ABS, long CMBX AAA and ABX AAA 06-01 and 06-02. Long LevX Series 1 Senior in Europe, which provides short-dated exposure to seasoned leveraged loans. Against these long risk positions, we remain cautious on mezzanine tranches and cyclical corporates. In the rates space, we like agency mortgages and in particular specified pools that have suffered from wider spreads and from the lack of balance sheet to hold these assets.