Morgan Stanley Downgrades Global Equities; Sees US as 'defensive' Market Amid Mideast Conflict

Morgan Stanley Downgrades Global Equities, Highlights US as Defensive Market

Morgan Stanley's Strategic Shift Amid Global Uncertainty

Downgrade of Global Equities and Upgrade of Safe-Haven Assets

March 30 (Reuters) - Morgan Stanley downgraded global equities and upgraded cash and U.S. government bonds, as investors shun risk in favor of safe-haven assets due to mounting uncertainty stemming from the Middle East war.

The Wall Street brokerage cut its rating on global equities to "equal weight" from "overweight", while raising U.S. Treasuries and cash to "overweight" from "equal weight."

Impact of Oil Supply Disruption on Risk Assets

"Uncertainty around magnitude and duration of oil supply disruption means outcomes for risk assets have become increasingly asymmetrical," Morgan Stanley strategists said in a note on Friday.

Brent has soared 59% this month, its steepest monthly jump, exceeding gains seen during the 1990 Gulf War. Futures climbed above $116 a barrel on Monday.

Potential Consequences for Global Equity Valuations

The brokerage warned that if oil prices stay at around $150-$180 per barrel, global equity valuations could shrink nearly 25%.

Regional Equity Adjustments and Market Preferences

The firm has trimmed its overall equity exposure through a downgrade in U.S. and Japanese stocks to "equal weight" from "overweight".

Risks Facing Japanese Stocks

"We turn equal weight on Japanese stocks given negative tail risks as we expect it to come under pressure from supply chains and global recessionary impacts in a scenario where the Strait (of Hormuz) remains closed for longer," the strategists said.

Continued Preference for U.S. Stocks

Still, Morgan Stanley retained a preference for U.S. stocks compared to other regions, given higher earnings-per-share growth.

U.S. Assets Emerging as a Safe Haven

U.S. ASSETS EMERGING AS A SAFE HAVEN AGAIN?

The shift stands in sharp contrast to most of last year, when investors shunned U.S. assets due to tariff-related uncertainties and rotated cash to European, Japanese and emerging market assets.

Fund Flows and Defensive Positioning

Fund flows to U.S. equities and bonds have overtaken the rest of the world since the Middle East conflict began last month, with investors "looking to U.S. assets as a more defensive market again," Morgan Stanley said.

Diversification Benefits of U.S. Treasuries

In an oil supply shock, U.S. Treasuries offer better diversification as the country is less energy import-dependent than Europe, the strategists added.

(Reporting by Joel Jose and Siddarth S in Bengaluru; Editing by Sonia Cheema)