Morgan Stanley downgrades global equities to 'underweight'

Morgan Stanley has cut its stance on global equities to 'underweight', taking its allocation down to the lowest level in five years, as it argued that the risk/reward over the next three months looks "poor".

The bank, which prefers European and Japanese equities to emerging market and US stocks, said earnings are generally too high and a continued deterioration in global PMIs suggests a macro environment "with plenty of downside risks".

"We think that the 'pause' in US/China trade tensions, post-G20, does little to address these. Meanwhile, expectations for central bank accommodation are high," it said.

Morgan Stanley said it was increasing allocations to EM and Japanese government bonds.

"EM fixed income won't be immune in a larger equity sell-off, but we do think it will do better, supported by better valuations and our expectations for a weak USD and further central bank easing," it said. It added that Japanese government bonds have lagged the decline in core European yields and look attractive.

MS said further policy easing in line with its economists' call could boost markets, although the effect could be offset by weaker data and already high central bank expectations.

"Elevated equity risk premiums mean that the cost of running underweight equities for extended periods is high; we think there are enough challenges for these premiums to be offset over the next 3-6 months."