In light of the ongoing Middle East conflict, Morgan Stanley has decided to downgrade global equities while upgrading cash and U.S. government bonds.
The firm, on Friday, adjusted its rating on global equities to "equal weight" from "overweight", while raising U.S. Treasuries and cash to "overweight" from "equal weight," reported Reuters.
Strategists at the firm pointed out the increasing risk asymmetry in asset outcomes due to the unpredictable impact and duration of oil supply disruption. Brent crude has seen a sharp 59% increase this month, surpassing gains observed during the 1990 Gulf War.
At 7:14 AM ET, Brent crude oil is trading 2.19% higher at $115.03 per barrel.
The brokerage warned of a possible 25% reduction in global equity valuations if oil prices continue to hover around $150-$180 per barrel. Consequently, Morgan Stanley has reduced its overall equity exposure, downgrading U.S. and Japanese stocks to "equal weight".
Despite these changes, the firm still prefers U.S. stocks over other regions due to higher earnings-per-share growth. The strategists observed a shift in investor sentiment, with U.S. assets becoming a safe haven and "defensive" amid the Middle East conflict, a significant change from last year's trend.
Economist Flag 10-15% Market Correction
Rising tensions in the Middle East and surging oil prices have shifted market sentiment, said economist Jeremy Siegel. He expects markets could correct by around 10%, though not a major downturn for the S&P 500.
The bigger concern, he says, is consumer confidence, as higher fuel prices quickly hurt sentiment despite mixed economic effects. Even though energy companies gain, and a strong dollar helps cushion costs,
Meanwhile, top economist Mohamed El-Erian told Business Insider that the economic impact of the Middle East conflict has already hit a critical level and could reach another turning point soon if tensions don't ease.
At the same time, Ed Yardeni of Yardeni Research warned that rising chances of U.S. military involvement are intensifying market uncertainty, describing it as a "fog of war." The S&P 500 has already fallen about 8.7% from its peak and slipped below key technical levels, with a 15% correction possible, reported Fortune.
Despite investor anxiety, Yardeni noted that extremely bearish sentiment could be a positive signal, suggesting markets may rebound from a contrarian standpoint.
Price Action: Over the past month, Vanguard S&P 500 ETF
