10 Ways To Make A Fortune In A Year Of Political Disarray

David Darst Morgan Stanley StrategistDavid Darst, Morgan Stanley Smith Barney

Photo: Fox Business News

Morgan Stanley Smith Barney is bearish on 2012, blaming policy disarray.  And they’re advising their client to invest with this in mind.From their January letter to clients.

The Global Investment Committee (GIC) believes policy disarray on both sides of the Atlantic has tipped the Euro Zone into a recession, with the US soon to follow. Still, while regional economies are linked by trade and finance more than ever, the global economy will likely avoid recession due to emerging market (EM) growth. Despite the headwinds to EM exports that may be caused by sluggish outlooks for the developed- market (DM) economies, both Morgan Stanley and Citi economists expect GDP growth in EM countries to exceed 5% in 2012.

Given a slower-than-desired growth forecast, the GIC enters 2012 with a more cautious stance toward risk assets than in recent years. Still there are always investment opportunities that offer attractive valuation, portfolio diversification, income generation and other.

With all this in mind, MSSB’s GIC led by Jeff Applegate and David Darst offer their 10 best investment ideas for 2012.

US Large Cap Growth is more defensive than mid- and small-caps

Benchmark: Russell 1000 Growth Index

'This selection incorporates our preference for US equities in terms of market capitalisation and style. Large-cap stocks tend to be more defensive than mid- and small-cap stocks and typically outperform them in adverse market conditions. Moreover, from a valuation perspective, large-cap stocks appear historically cheap relative to mid- and small-cap stocks.

A similar line of reasoning augurs well for growth stocks over value stocks. By historical standards, value stocks appear expensive relative to growth stocks.'

Source: Morgan Stanley Smith Barney

Dividend Aristocrats will give you growing income

Benchmark: S&P 500 Dividend Aristocrats Index

'This index comprises 42 large-cap, blue-chip companies that have raised dividend payouts annually for at least 25 years. Companies in the index have solid franchises in the health care, consumer products and materials sectors. In a period of record-low money-market and bond yields, dividend-paying equities can offer an attractive source of income.'

Source: Morgan Stanley Smith Barney

Global Gorillas give you EM exposure through multinational giants

Emerging Markets Equities offer exposure to strong growing economies

Benchmark: MSCI Emerging Markets Index

'Emerging market economies are on much better footing than their developed- market counterparts, thanks mainly to robust domestic demand in the developing economies.

Many EM countries do not face the debt burdens that are creating problems for developed countries, allowing for more fiscal policy flexibility. Meanwhile, as inflationary pressure has dissipated the monetary-tightening cycle has come to an end and policymakers have started to ease.'

Source: Morgan Stanley Smith Barney

Investment Grade Credit is way more attractive than Treasuries

Benchmark: Barclays Capital US Aggregate Corporate Investment Grade Index

'We believe the very strong balance sheets of investment-grade companies will enable them to better withstand a slowdown in economic growth than at any point in recent history. A historically wide spread--or yield advantage versus low risk-free rates--and significantly lower volatility relative to other risk assets make a compelling case for investment-grade corporate bonds.'

Source: Morgan Stanley Smith Barney

High Quality Municipal bonds offer relatively safe, yet attractive returns

Short-Duration Bonds are about as safe as they get

Benchmark: Barclays Capital Global Treasurys 1 to 3 years Index

'Given the potential for a recessionary backdrop and concerns about ongoing financial risks stemming from Europe, we have increased our allocation to safe-haven assets. Short-duration fixed income offers favourable yields relative to cash. Moreover, the defensive properties of this asset class should reduce volatility in diversified portfolios during turbulent periods.'

Source: Morgan Stanley Smith Barney

Water usage is reaching unsustainable levels

Managed Futures offer diversification benefits through low correlations

Benchmark: CASAM CISDM CTA Equal-Weighted Index

'Managed futures-- funds and accounts that can take both long and short positions in futures contracts and options on futures contracts in the global commodity, interest rate, equity and currency markets--generally have low correlations of returns with stocks, bonds and other alternative asset classes, including hedge funds.'

Source: Morgan Stanley Smith Barney

Master Limited Partnerships offer tax-efficient exposure to energy and real estate

Benchmark: Alerian MLP Index

'Master limited partnerships (MLPs)--limited partnerships that trade on a securities exchange--offer the tax benefits of the limited-partnership structure and the liquidity of publicly traded securities. MLPs are concentrated in natural-resource industries such as oil, natural gas and minerals extraction, and they are attractive to yield hunters for their usually robust quarterly dividend payouts...

As with real estate investment trusts, MLPs have a special status in the US tax code: They avoid state and federal corporate income taxes and must generate and pay out 90% of their income from producing, transporting and/or processing natural resources.'

Source: Morgan Stanley Smith Barney

More reasons to invest conservatively

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