With the Iran war and uncertainty looming large in the oil market, Morgan Stanley advises investors to protect their portfolios. President Donald Trump said in a speech Wednesday night that the United States would hit Iran “very hard” and suggested the conflict could last weeks, dashing hopes of traders hoping for a resolution to the Iran war. Oil prices soared in response, with West Texas Intermediate crude oil futures for May delivery rising more than 11% to settle at $111.54, the highest close since June 2022. Brent crude oil futures for June delivery rose 7.78% to settle at $109.03. Morgan Stanley strategists said in a note Friday that the instability surrounding energy supplies does not bode well for stocks. “Uncertainty about the scale and duration of oil supply disruptions means outcomes for risk assets are becoming increasingly asymmetric,” the strategists said. “We recommend being defensive as the potential downside has increased significantly.” Less investment in global equities, more cash The strategists downgraded global equities from overweight to equal weight among their asset allocation recommendations, including reducing exposure to emerging markets. The hypothetical portfolio has a 55% equity weighting, with 32% in the US, 10% in Europe, 5% in Japan, and 8% in emerging markets. “Earnings trajectory and fundamentals remain strong in the lead-up to the outbreak of conflict in the Middle East, which is why we tilted toward equities at the end of February,” Morgan Stanley said. “However, we would rather be more defensive now, as potentially higher energy prices and increased geopolitical risks weigh on both earnings and multiples.The strategist team also noted that while there are positive signs in Brazil, Asia’s emerging markets are dependent on Middle Eastern supplies of crude oil, refined products, and (liquefied natural gas).” In terms of fixed income, 25% of the portfolio is allocated to core bonds, 20% to government bonds and 5% to government mortgage collateral. The strategists upgraded Treasuries from an equal weight to an overweight, saying, “[U.S. Treasuries]still have diversifying properties, as evidenced by their recent correlation with equities, and the optimal asset allocation in past oil price shocks has been heavy on USTs.”Finally, the team has 11% of their portfolio dedicated to this safe-haven asset, and “we believe it is prudent to add cash and wait for better opportunities.” The strategists added that the allocation to cash is “the highest in years,” adding that the portfolio has a 5% weighting in “other fixed income,” including U.S. high-yield bonds and emerging market bonds, plus a 4% allocation to commodities.
