Morgan Stanley has revised its asset allocation in response to mounting uncertainty related to the Middle East conflict, reducing its stance on global equities and increasing positions in safe-haven instruments.
In a note published on Friday, the Wall Street brokerage lowered its rating on global equities to "equal weight" from "overweight." At the same time it upgraded U.S. Treasuries and cash to "overweight" from "equal weight," signaling a shift toward assets perceived as safer amid heightened geopolitical risk.
The strategists highlighted growing ambiguity around both the magnitude and duration of potential oil supply interruptions, saying those unknowns have made outcomes for risk assets markedly asymmetrical. That assessment follows a severe spike in oil prices: Brent has risen 59% this month, registering its steepest monthly increase and surpassing the percentage gains recorded during the 1990 Gulf War. Futures traded above $116 a barrel on Monday.
Morgan Stanley cautioned that if oil were to remain in a roughly $150 to $180 per barrel range, global equity valuations could contract by nearly 25% from current levels. To reduce exposure to that downside, the firm said it has trimmed its equity weighting overall by moving its ratings on U.S. and Japanese stocks to "equal weight" from "overweight."
The note specifically cited Japan as vulnerable to negative tail risks. "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 wrote, pointing to the potential for extended logistical disruptions to harm Japan's economy and equity market.
Despite the broader downgrade, Morgan Stanley kept a relative preference for U.S. equities versus other regions on the grounds of stronger earnings-per-share growth prospects in the United States. That stance aligns with recent investor behavior: since the Middle East conflict began last month, fund flows into U.S. stocks and bonds have outpaced flows into other regions, reflecting a renewed view of U.S. assets as more defensive.
The firm also noted that in an oil supply shock, U.S. Treasuries provide superior diversification benefits because the United States is less dependent on energy imports than Europe. That relative energy independence, in Morgan Stanley's view, underpins the appeal of U.S. government bonds as a stabilizing allocation when oil market disruptions are prominent.
Bottom line: Morgan Stanley has repositioned portfolios toward cash and U.S. government bonds while trimming equity exposure, driven by concerns about oil-driven disruptions from the Middle East and the asymmetric downside such a shock could impose on global equity valuations.