With uncertainty looming large over the Iran war – and the oil market – Morgan Stanley is recommending investors play defense in their portfolios. President Donald Trump dashed traders’ hopes for a resolution to the Iran war when he spoke on Wednesday night, saying that the U.S. would hit Tehran “extremely hard” and he suggested that the conflict could go on for weeks. Oil prices surged in response , with West Texas Intermediate crude futures for May delivery jumping more than 11% to settle at $111.54, its highest close since June 2022. Brent crude futures for June delivery advanced settled up 7.78% at $109.03. Shakiness around energy supply does not bode well for stocks, Morgan Stanley strategists said in a Friday note. “Uncertainty around magnitude and duration of oil supply disruption means outcomes for risk assets have become increasingly asymmetrical,” the strategists wrote. “With potential downside rising significantly, we recommend turning defensive.” Backing off global equities, ramping up on cash In their asset allocation recommendation, the strategists downgraded global equities to equal weight from overweight, including dialing back exposure to emerging markets. The hypothetical portfolio has a 55% weighting in equities: 32% is toward the U.S., 10% to Europe, 5% to Japan and 8% to emerging markets. “Earnings trajectory and fundamentals going into the start of the conflict in the Middle East had been strong, a reason we leaned more into stocks at the end of February,” Morgan Stanley said. “But potentially higher energy prices and greater geopolitical risk will weigh on both earnings and multiples and now we’d rather stay defensive. The team of strategists also noted that though Brazil presents a bright spot, emerging markets in Asia are “dependent on Middle Eastern supply of crude oil, refined products, and [liquefied natural gas].” With respect to bonds, 25% of the portfolio is earmarked to core fixed income: 20% is in government bonds and 5% goes toward agency mortgage-backed securities. The strategists upgraded government bonds to overweight from equal weight, noting that “[U.S. Treasurys] still have diversifying properties as seen in recent correlations with equities, and the optimal asset allocation in past oil price shocks has been a higher weight to USTs.” Finally, the team is overweight on cash, with 11% of the portfolio committed to this safe haven asset. “We think it’s prudent to add cash and wait for better opportunities to arise,” the strategists said, adding that their allocation to cash is “the highest it’s been in years.” In addition, the portfolio has a 5% weighting to “other fixed income,” which includes U.S. high yield bonds and emerging market debt, plus a 4% allocation toward commodities. —CNBC’s Michael Bloom contributed reporting.
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Tuesday, June 9
