Morgan Stanley's Fall Playbook: Buy US Stocks, Avoid 'Bond Proxies': TheStreet

TheStreet

Published on Sep 22, 2016

Despite some recent softening economic data, the U.S. has the world's strongest economy and most profitable companies. That's why the investors should remain overweight U.S. stocks, said Zack Apoian, senior asset allocation specialist at Morgan Stanley Wealth Management . Apoian adds that emerging markets are also on a roll, and should be a part of any portfolio. "Emerging markets have outperformed since the start of the year largely due to improving macro conditions," said Apoian. "A stable dollar and slower Fed helps these liquidity-starved nations and stabilizing oil prices, even in the current $40 to $45 per barrel range, is sufficient to lift commodities-sensitive economies." Apoian is actually bullish on British stocks despite June's Brexit vote. He said the U.K.'s strong fiscal condition grants it significant leverage in negotiations with the EU. Further, he finds the outlook for potentially avoiding recession appears to be improving. "The companies are largely global exporters who benefit from weakened currency and a global industrial sector that continues to improve," said Apoian. On the other hand, he sees Continental European stocks as less attractive, saying risks abound, including a potentially difficult Brexit negotiation, waning support for German Chancellor Merkel, and "potential disruption in banking systems" due to the negative rate environment. As for his fixed income outlook, Apoian sees a continuation of low global rates, so he would overweight equities and fund this with an underweight in bonds, especially avoiding long-duration ones. "There is very little term premium or compensation for locking up money with longer-term bonds. The recent leg up in global rates has exposed their potential volatility," said Apoian, adding that he likes high yield because credit spreads may contract further with economic improvement. He said he would also avoid "bond proxies" such as utilities and REITs, which trade with low volatilities and higher yields. "These are typically associated with safety and risk aversion, but with their rich valuations and high interest rate sensitivity, have underperformed the second half of this year," said Apoian.