Morgan Stanley Favors Equities in 2018, Ups Bonds

Morgan Stanley keeps a bullish call on equities in cross asset 2018 outlook published today, but ups government bonds to « Equal-Weight » and lowers credit to « Underweight ». Timing will be tricky. The bank also prefers EM debt.

« A late-cycle handoff: Our base case calls for moderating growth in the US and China to be offset by improvements elsewhere. But this handoff will likely be tricky, and occurs against a backdrop of rising core inflation and less accommodation.
But timing matters for growing cautious: 1Q18 should still see strong global growth with stable core inflation. Corporate investment is still well below prior cycle highs. Our cycle models have not yet turned. We think that there will be a better opportunity to reduce exposure strategically in 1Q18.
Staying OW equities, but lowering credit and raising government bonds: We reduce credit to UW, but keep a strong preference for EM over corporate debt. We raise government bonds to EW, with a bias towards the US and EM. We trim our equity exposure by 1%, but remain OW. »

Here is the cover of the report with summary of key calls: