Morgan Stanley downgrades global stocks; US seen as a defensive market

Morgan Stanley has downgraded global stocks and upgraded U.S. government bonds and liquid assets, with investors fleeing risk in favor of safer assets due to increasing uncertainty related to the war in the Middle East.

The Wall Street brokerage firm lowered its rating on global stocks from “overweight” to “equal-weight”, while raising U.S. Treasury bonds and liquid assets from “equal-weight” to “overweight”.

“The uncertainty about the extent and duration of the oil supply disruption means that the results for risk assets have become increasingly asymmetric,” Morgan Stanley strategists said in a note on Friday.

Brent has surged 59% this month, its biggest monthly increase, surpassing the gains seen during the Gulf War in 1990. Futures contracts exceeded $116 a barrel on Monday.

The brokerage firm warned that if oil prices remain around $150 to $180 per barrel, global stock valuations could decrease by nearly 25%.

The company reduced its overall exposure to stocks by downgrading U.S. and Japanese stocks from “overweight” to “equal-weight”.

“We are putting Japanese stocks on an equal footing due to negative risks, as we believe they will be subject to supply chain pressures and impacts from the global recession scenario where the strait (of Hormuz) remains closed longer,” the strategists said.

However, Morgan Stanley still prefers U.S. stocks over other regions due to higher earnings growth per share.

ARE U.S. ASSETS BECOMING A SAFE HAVEN AGAIN?

This shift contrasts sharply with most of last year, when investors shunned U.S. assets due to uncertainties related to tariffs and shifted their liquidity to European, Japanese, and emerging market assets.

Funds flowing into U.S. stocks and bonds have outpaced the rest of the world since the start of the conflict in the Middle East last month, with investors “reconsidering U.S. assets as a more defensive market,” Morgan Stanley said.

In the event of an oil shock, U.S. Treasury bonds offer better diversification as the country is less dependent on energy imports than Europe, the strategists added.