A 2014 market update

The Morgan Stanley Global Investment Committee meets monthly to review the economic and political environment and discuss favored long-term trends that they believe offer worthy investment opportunities. Recently, Morgan Stanley upped our exposure to U.S. equities, reduced our exposure to short-duration bonds and we’re advising a slight bias in the portfolio towards growth, as opposed to value.

Our view right now is that the economy is moving into the latter stages of this recovery. In the past, there have been certain parts of the market that tended to do better during the latter part of the recovery. So the message we’re going out to our clients with is that as the economy recovers, correlations among stocks tend to drop off and stock selection takes on more importance.

In the past, we’ve had this market, many of the stocks moving up and down in lockstep. But as we get into the later stages of the recovery, we believe correlation among stocks will fall, and that makes finding a manager that can make – has a history of making good stock selection more important and to have a better opportunity to add value in a portfolio, so favoring stock pickers. We also tend to favor midcap or small- and midcap with the emphasis on midcap names to do better at this stage of the market cycle. If you look at the year-to-date numbers, midcaps are leading the way over small caps and large caps. So that appears to be playing out.

And then looking at the sectors in your portfolio, there are certain sectors that in the past, again, tend to do better during these stages of the economic recovery. In particular, what we’re talking about would be energy, industrials, materials, healthcare, and technology. We think making sure that you have an emphasis in these sectors in your portfolio at this point makes sense.

We feel that there’s a confluence of things happening in Japan right now. Fiscal and monetary policy are converging along with reforms in the Japanese government pension plan with an increased weighting toward Japanese stocks  was recently announced. They’re going to rebalance a very significant amount of money away from bonds and into stocks.

So we think it’s a combination of these factors that makes Japan attractive. We’ve got a slight overweight on Japan. And I should point out year-to-date, it hasn’t worked. Year-to-date, that market’s off 3.3 percent, so I think for people that are interested in that, the timing’s still good to jump in on that trade if they’re interested. But I would point out that if you’re going to do that, be careful that you look at hedging the currency. We want exposure to the market, but we don’t want exposure to the currency, probably not 100 percent anyway.

A lot of people have incorporated indexing or passive kinds of investment strategies into their portfolio, trying to mimic an index. It might be the S&P or the Russell or something similar. When correlations are high among stocks, indexing is a popular way to go because you tend to capture most of the performance, upside that is, and you do it with a very low cost structure. Our view is, is that if we’re right and correlations start falling among stocks, those passive kinds of investments aren’t going to keep pace and we’re more likely to see active managers who are making active bets on stocks or sectors to outperform these indices.

Categories: Finance