MSSB likes emerging markets, U.S. large-caps

Looking at a developed world that may dip into recession, the global investment committee at Morgan Stanley Smith Barney LLC has decided to dial back risk. The firm has changed its global equities stance from overweight to underweight and, for the first time, is overweighting 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-markets equities are trading at a discount to the developed world and have a better fiscal stance,” he said. “For that reason, we're maintaining an overweight in emerging-markets equities and large-caps in the U.S., where we favor growth, but we're underweighting Europe and Japan.” At a press gathering last week 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 muni 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 muni 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, MSSB's global investment committee 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 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,” Mr. Darst said. Email Evan Cooper at [email protected]