UNVEILED: Morgan Stanley's 10 Smartest Trades For 2013

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Photo: Flickr / higgot

Morgan Stanley’s global cross-asset strategy team, led by Greg Peters, is out with its Top 10 Asset Allocation Trades for 2013.The trades sum up investment bank’s macro views and are fairly straightforward: all of the trades consist of stocks, bonds, and currencies.

One interesting aspect of the team’s recommendations: they are mostly skewed away from investing in U.S. assets, as Morgan Stanley sees other areas they think represent bigger opportunities.

Overweight stocks in Asian markets (ex-Japan)

The logic: 'Attractive relative valuation, the prospect of macro improvement, and consequently, relatively lower risk to current consensus earnings forecasts'

Source: Morgan Stanley

Moderately overweight stocks in European markets

The logic: 'Europe has attractive valuations relative to the US and better leverage to EM growth; we also believe stress will continue to fall in the periphery'

Source: Morgan Stanley

Underweight US stocks

The logic: 'We believe that this is a crowded trade, with the most earnings risk in a relatively expensive market'

Source: Morgan Stanley

Buy US and European stocks exposed to China

The logic: 'With 90% of global growth from EM, and attractive relative valuations, we like the risk-reward from EM exposed sectors such as US Industrials, and EU Materials.'

Source: Morgan Stanley

Go long Spanish and Italian bonds

The logic: 'We view this as the last vestiges of tail risk removal. Notwithstanding the rally, spreads are too wide relative to the ECB's intent to lower peripheral funding costs'

Source: Morgan Stanley

Go long German government bonds, while shorting US and Japanese government bonds

The logic: 'The ongoing eurozone recession, coupled with an accommodative ECB, will provide a better supportive backdrop for Bunds. Outlook for Treasury not as positive given growth prospects and resolution of the Fiscal Cliff, while Japan may finally allow JGBs to rise'

Source: Morgan Stanley

Go long European corporate credit and short US corporate credit

The logic: 'In our view, European corporate credit spreads are being unduly punished for the credits' domicile, and not necessarily on the merits of the underlying credit fundamentals.'

Source: Morgan Stanley

Collect yield by playing term structures rather than taking on duration risk

The logic: 'While we are not fretting a spike in interest rates in 2013, we believe that investors are better served taking on structure risk, rather than moving out further on the curve for yield and spread'

Note: In other words, there are two ways for investors to collect a yield premium. One is by investing in riskier, longer-dated bonds that yield more interest (taking on duration risk). The other entails deploying carry trades to take advantage of widened spreads between similar assets with different durations.

Source: Morgan Stanley

Go long the US dollar, short the Japanese yen

The logic: 'The chance that Japan will finally experience a significant policy change in order to break the deflationary gap is higher today than recent history'

Source: Morgan Stanley

Go long gold

The logic: 'The monetary easing programs of the Fed and ECB are two examples of expansionary monetary policy that will keep inflation and currency debasement risks elevated, and therefore gold, well supported'

Source: Morgan Stanley

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