The Morgan Stanley Global Investment Committee meets monthly to review the economic and political environment and discuss favored long-term trends that they believe offer worthy investment opportunities.
We believe that we’re headed into the second stage of an economic recovery here in the United States. In the past, interest rates and stocks have typically risen together during this second stage of economic recovery. We also see correlations among stocks continuing to fall in that environment. Therefore, we favor active styles of management, stock pickers if you will, in some of the investment selections that we’re making – mutual funds for money managers.
We suggest over weighting information and technology, financials, industrials, and health care sectors that tend to do well during this second stage of economic recovery.
We also favor midcap stocks in this environment. The Russell Midcap Index is positive for the year, while small cap and large cap indexes are negative as I write this.
The next theme we believe investors should consider is Japanese equities. Japan is embarking on an unprecedented monetary policy, accompanied by tax law and pension reform. We think investors might benefit from some exposure to the Japanese equity market. It’s the confluence of monetary and fiscal policies that we think looks quite encouraging and we would seek pretty broad exposure to Japanese equities.
However, we would caution that you’d want to take into account the currency and the weakening yen – which is their objective – and therefore hedge the currency risk. So how can people play Japanese equities? Rather than playing the individual equities, one may consider ETFs and funds.
As a third theme, we think European equities as a value play looks very attractive. If you look at the price of European stocks relative to US stocks, by some measures they’re as cheap as they’ve been in the last 40 years. Looking at the European economic recovery, we feel there’s some indication that their banking and financial reforms are headed in the right direction. That causes us to look at the European equities as very attractive right now. And, again, ETFs and funds are probably the best way to play that.
In our view interest rates have bottomed and are likely headed up and will continue to do so. It may not be abrupt; it might be gradual. But in our view we’re going to be fighting an uphill battle with respect to rates. Having said that, we would encourage people to shorten durations in their portfolios. Rather than going out on the long end of the yield curve and seeking higher yields, shorten up in order to stay away from big interest rate bets.
We would, however, encourage more credit sensitive bets. If we’re in this second stage of the economic recovery, stick with your higher yield bonds, up to the five-year maturities. Municipal bonds look pretty attractive. We recommend maturities of seven to ten years. We recommend shorter maturities with the government and corporate bonds. In other words, take credit risk not interest rate risk.
In summary, we recommend a net theme of diversification, looking at investments that might meet your overall return objectives but also help dampen volatility in the portfolio. When we talk about alternatives, we’re talking about inflation protected bonds, managed futures, possibly hedge funds, real estate investment trusts, private equity and commodities. The reason they’re called “alternative” is because they historically tend to have low correlation to stocks. These are investments that may not be suitable for everybody, but for some people it’s a good way to add diversification to their portfolio.
Todd Hauer is a Wealth Advisor and Senior Investment Management Consultant with the Global Wealth Management Division of Morgan Stanley in Denver. He can be reached at Todd.Hauer@morganstanley.com or 720.488.2406.
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