Morgan Stanley's studies recommend cutting risk, with equal weight across assets. For upside, look to Japan, energy, Munis, and mortgage-backed securities. 

This is the predicament that investors face today is “the most chaotic, hard-to-predict macroeconomic time in decades.” The Midyear Economic Outlook takes the view that the global economy will bypass a recession in the year 2022, and will end the year with 2.9% GDP growth but cautions that the road ahead is rife with risk. 

That’s certainly true for investors “So far, 2022 has not only seen a tragic conflict in Europe, but it’s also the worst bond market performance since 1980, whereas the biggest commodity outperformance since data began in 1960, and there are large moves within and between equity indices.

According to the late-cycle lens approach, In the current time for investors, it is highly needed to be defensive, diversified, and patient. It is noted that rules-based strategies which systematically look for relative value across asset classes have done, & should continue to do, well. 


Here are Four Key Takeaways for Investors:

  1. U.S. Equities: More of the Same

The reason for recent volatility in U.S. equities isn’t unfounded. Downward earnings revisions and a weaker Purchasing Managers' Index (PMI) suggest the bear trend in the market is not finished. And there are further de-rating and U.S. weakness. 

  1. Europe Gets Worse Before It Gets Better

At a glance, Europe stocks are trading at attractive valuations. But, according to European strategists studies the prices may not yet reflect all the bad news. 

In fact, while the index price-to-earnings ratio was recently in the low double digits, over the last 15 years it has dipped into the single digits twice. “And while MSCI Europe trades at a record-low relative valuation to the S&P, its relative valuation against MSCI ACWI ex-US is actually above average,” says Graham Secker, Head of the European Equity Strategy Team. 

Moreover, Europe has revised the GDP forecasts lower and the inflation estimates higher, and at a time when the European Central Bank is beginning to remove policy stimulus and struggling to stabilize the currency. Secker says, against this backdrop, that we think that the risk/reward profile for MSCI Europe remains unattractive.  

  1. Japanese Equities Offer Upside

Unattractive risk & reward profiles are also a common theme throughout much of Asia, including giant China. So equities of Japan continue to be a notable outlier. Valuations are low, return on equity is approaching a High of 40-year, and when the Japanese yen weakens as a result earnings are boosted. Meanwhile, the macro-economic observation/outlook is relatively positive. Growth for GDP, while modest at 1.9%, is an improvement over 2021; when the country has low inflation and a central bank on hold. Strategists see the TOPIX returning 9.3% over the next 12 months. 

  1. Strength in Oil, Munis, and Mortgages

In the second half of 2022, the strategists see a few asset classes that may provide an upside: 

Commodities: Given supply ups & downs and the war in Ukraine, it’s no surprise that commodities are on track to outperform equities for the second consecutive year from 2021-2022 and energy commodities still have the potential for upside but commodities struggle more. According to Morgan Stanley’s studies, Brent oil prices will rise to $130 in the third quarter of this year. 

Municipal bonds: Munis present is a solid risk/reward opportunity due to durable credit quality and attractive valuations. Since pandemic-level lows, it struggled & recovered, and “given positive real GDP growth. It explores an understanding that inflation is generally a neutral credit factor, these gains should be locked in through year-end. 

Mortgage-backed securities: It may not be a great time to shop for a mortgage, since 2009 with an average of 30-year fixed-rate loans has recently reached its highest levels. Residential mortgage-backed securities (RMBS), on the other hand, are attractive & low risky, particularly relative to corporate credit. Jay Bacow says that, in looking out over the next 12 months, non-agency RMBS is our preferred asset class across securitized credit.