MSSB down on Europe and Japan, high on munis, U.S. large caps

Looking at a developed world that may dip into recession, the global investment committee at Morgan Stanley Smith Barney has decided to dial back risk. The firm has changed its global equities stance from an overweight to an underweight and, for the first time, put an overweight on managed futures, going to 7% of its model portfolios from 4%. “When we look around the world, we see anomalies in equities,” said Charles Reinhard, the firm's deputy chief investment officer. “Emerging market equities are trading at a discount to the developed world and have a better fiscal stance. For that reason, we're maintaining an overweight in emerging market equities and large caps in the U.S., where we favor growth, but we're underweighting Europe and Japan.” At a press gathering in New York where MSSB strategists discussed the steps the firm took starting Oct. 6, Mr. Reinhard said that inflation is receding around the world and will be lower in 2012 than this year. On the municipal bond front, John Dillon, the firm's chief municipal bond strategist said that the Armageddon scenario expected by some forecasters hasn't happened because local governments are taking the necessary steps to put their fiscal houses in order. In addition, buyers are being more careful about credit quality now that municipal bond insurance is less common. “I expect defaults to remain quite rare and, at present, I like high-quality munis with maturities of six to 14 years.” Mr. Dillon said. Over the long-term, Morgan Stanley Smith Barney's global investment committee, which is responsible for developing the investment outlook that guides its brokers' advice to clients, is much more optimistic about the overall health of the U.S. markets. “Part of our committee's longer-term view is that this is a rough patch,” said David M. Darst, chief investment strategist for Morgan Stanley Smith Barney and vice-chairman of the Global Investment Committee. “This is a period of resetting, reprogramming, cleansing, catharsis and purging. All that will end at some point.”