MSSB plans for the worst with new asset allocation

In what the firm calls its “most significant change” to its tactical asset allocation in two years, Morgan Stanley Smith Barney LLC's global investment committee is adopting an overweight position in safe havens and underweight position in risk assets, including commodities, according to a firm research bulletin distributed today. The shift is due to increased concern in recent weeks about “the risk of recession in the U.S. and the rest of the developed world,” the Oct. 6 report said. It goes on to blame a “combination of policy inaction and ineptness in the U.S. and Europe.” MSSB analysts favor cash, short-duration debt, investment-grade bonds and managed futures, an asset class that's expected to perform well during extended periods of adverse equity market conditions, the report said. For equities, Morgan Stanley Smith Barney recommends overweighting large-cap U.S. stocks and emerging markets, and underweights European and Japanese equities. The firm is also underweighting real estate investment trusts, commodities, high-yield bonds and emerging-markets debt. Government bonds in the U.S. and Germany are also underweighted. The report's authors point out the state of the Economic Cycle Research Institute's U.S. Leading Diffusion Index, which shows the proportion of components from its leading indexes that have weakened over six months. In more than 60 years, only once has the index fallen as low as current levels without having a recession. The report explicitly states: Europe will “soon be in a recession.” "It's a little late to get bearish now," said Jamie Cox, financial adviser with Harris Financial Group, which manages about $400 million. "That should have been done in more like April or May." Mr. Cox is recommending investors put more money into equities because many prices have come down. He agrees with the research report conclusion that large-cap U.S. stocks are a good play. "There are some significant values that long-term investors can get out of equities right now," Mr. Cox said.