Morgan Stanley's anti-US asset allocation

With some $200 billion under management Morgan Stanley is one of the global giants of investment. It was thus a rare treat to have its Chief Investment Officer in Dubai, and a chance to catch up with the latest thinking on global investment strategies.

Interestingly Morgan Stanley has now moved to an investment strategy not unlike the one that Dr. Marc Faber has been advocating on AME Info in his column for several years. But there are naturally some differences.

Mr. Brewer is against holding cash for too long as he notes that with inflation at 2% and interest rates at 1.5% there are negative real interest rates. Hence, you loose money just by holding cash.

However, Morgan Stanley views US equities as overvalued. Mr. Brewer compared the 40% of global equity held in Japan in 1980 to the 55% held in the US today, and noted that Japan is now at 8% and has been lower in recent years.

His message was that the US economy would have its 'Day of Reckoning' in the words of former US Treasury Secretary Robert Rubin, thanks to its monstrous indebtedness and a poor demographic outlook. The same factors also pointed to further weakness for the US dollar and he advised buying gold as hedge against dollar weakness and the twin US deficits.

Likewise, he also made a strong case for investment in oil and saw the $15-25 per barrel range of the past 20-odd years now moving to $25-40 per barrel or higher, mainly due to the China/India demand story. This may result in a 1970s type boom in oil stocks, which then amounted to 15% of the US stock market compared with 8-9% today.

Mr. Brewer also highlighted considerable value in Asian equities with attractive stock valuations, high domestic saving levels and good demographics.

One departure from the investment themes promoted by Dr. Marc Faber was an enthusiasm for European equities after the accession of the 11 new members of the European Union. Mr. Brewer thought new realism in wage control was a bullish sign, whereas other commentators see this as indicative of economic decline.

In short this was a useful analysis of the shifting balance in asset allocation recommendations, and a notably anti-US bias to investment from one of the top US investment houses.

Responding to questions, Mr. Brewer reckoned that UAE stocks were also an excellent buy and added that Morgan Stanley would be a buyer if the market was larger and more liquid which he hoped it would be in time.