Morgan Stanley’s cross-asset strategy team has been running a tactical long risk play in recent weeks. That allowed them to benefit from the moves that the combination of rallies in stocks, credit, bonds, currencies and commodities delivered over the past 5 weeks.
But that move is now running out of steam, so the analysts, lead by Andrew Sheets in London, last week “lowered overall portfolio risk”.
The reason they’ve done this is because the combination of lowered economic forecasts, the large rally since the February lows and the “rebound in sentiment all argue for reducing overall exposure,” Sheets and his team said in their latest Cross-Asset Playbook.
But there’s a problem in de-risking, the bank said.
“Our cautious forecasts are complicated by the fact that many ‘defensive’ assets are also expensive. This means we are highly focused on the least expensive ways to add diversification,” the team said.
As a result, foreign exchange plays a central role in their asset allocation with Morgan Stanley remaining bullish the yen and the US dollar.
“We believe that the USD bull market is not over, which makes us sceptical about the recent rally in EM and commodity equities.”
That’s potentially a risk for Aussie dollar bulls and investors playing the bounce in BHP, Rio Tinto, Fortescue and others.
Here’s the bank’s short, medium, and long term views on one page.