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 an underweight position in risky assets, including commodities, according to a firm research bulletin distributed early this month. 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.”

CHOOSING CAUTIOUSLY

MSSB analysts favor cash, short-duration debt, investment-grade bonds and managed futures, an asset class that is expected to perform well during extended periods of adverse equity market conditions, the report said. For equities, MSSB recommends overweighting large-cap U.S. stocks and emerging markets, and underweighting European and Japanese equities. The firm also is underweighting real estate investment trusts, commodities, high-yield bonds and emerging-markets debt. Government bonds in Germany and the United States also are underweighted. The report's authors pointed 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.

TOO LATE TO BE BEARISH

In more than 60 years, only once has the index fallen as low as current levels without a recession occurring. 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 recommends that 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. Email Liz Skinner at [email protected]