08.01.2011
By Terry Flanagan

Morgan Stanley Leans Toward Risk

In their July Global Investment Overview, Morgan Stanley Smith Barney (MSSB) Global Investment Committee reports that risk assets are the preferred investment vehicles over cash and bonds.
While yields are low and money market funds have severely underperformed in recent years, investors are still anxious to invest in the volatile equity markets—despite asset managers giving the green light.

“Within global equities, we continue to overweight emerging market and US equities; we remain underweight in other developed market equities. Within US equities, our capitalization preference is large caps; within style, it is growth,” according to the report. The lead author is Jeff Applegate, chief investment officer of MSSB.

Yet perhaps more unpredictable than the global equity markets would be global macroeconomic turmoil and its affect on global bond markets. Such uncertainty includes debt crises in Europe, which may a contributing factor to MSSB’s bearish outlook on short term debt.

“Within global bonds, we remain overweight to investment-grade, high yield and emerging market debt. We are underweight to developed-market sovereign and short-duration debt,” according to the report.

However, MSSB remains positive on the turnout of macroeconomic affairs in the U.S., making investments domestically a better bet than other development markets, notably Japan.
In Japan, a decent economic rebound is unlikely until 2012, said the report.

“We are looking for 15 percent earnings-per-share (EPS) growth this year for U.S. and global equities, driven by good sales growth and continued margin expansion. We expect EPS growth to be slightly lower in 2012,” commented the report, exemplifying MSSB’s bullish outlook on MSSB.

One asset class where the U.S. has lagged is in currencies. For MSSB, U.S. dollar underperformance has subsided in the short term, but it remains that the dollar will fall short compared to emerging market currencies, over the long-term.

“Most of the trade-weighted U.S.-dollar weakness is likely done. Longer term, we believe that the major developed market currencies will decline relative to emerging market currencies such as the Chinese renminbi and the Indian rupee,” said the report.
Executives at MSSB could not be available for comment by press time.

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