Morgan Stanley cut funds allocation to equities amid growing challenges

Morgan Stanley slashed its global equities allocation to the lowest in five years, and downgraded its investment recommendation to underweight, saying the outlook for stocks over the next three months looks particularly poor.

Profit forecasts remain too optimistic, as measures of manufacturing health around the world keep deteriorating, strategists including Andrew Sheets wrote in a note Sunday. Expectations for looser central bank policy are high, leaving little to boost already elevated equity prices, they said.

“We see a market too sanguine about what lower bond yields may be suggesting - a worsening growth outlook,” they said. “Continued deterioration in global PMIs suggests a macro environment with plenty of downside risks.”

With global stocks already up 16 per cent this year, some strategists are taking a more cautious stance as worries about a fragile global economy and the US-China trade war linger. Bond yields have hit multi-year lows in many parts of the world in recent weeks, showing a resilience in the appetite for haven assets.

The Morgan Stanley strategists prefer stocks in Japan and Europe to those in the US and developing nations, according to the note. They increased allocations to Japanese and emerging market government bonds.

“Emerging market fixed income won’t be immune in a larger equity sell-off, but we do think it will do better,” they wrote. “JGBs have lagged the decline in core European yields and look attractive on a currency hedged basis.”

Updated: July 8, 2019 12:28 PM