Morgan Stanley is advising investors to adopt a defensive stance in their portfolios as oil prices surge due to escalating tensions in the Iran conflict, according to a recent note from the firm's strategists.
Oil Prices Surge on Iran War Escalation
President Donald Trump's statement on Wednesday night, indicating a hardline approach against Tehran and suggesting the conflict could last weeks, led to a sharp increase in oil prices. West Texas Intermediate crude futures for May delivery jumped over 11% to $111.54, the highest since June 2022, while Brent crude for June rose 7.78% to $109.03.
Morgan Stanley's Defensive Recommendation
The strategists noted that uncertainty around the magnitude and duration of oil supply disruption has made outcomes for risk assets increasingly asymmetrical. "With potential downside rising significantly, we recommend turning defensive," they wrote in a Friday note.
Portfolio Allocation Shifts
In their asset allocation model, Morgan Stanley made the following changes:
- Equities: Downgraded to equal weight from overweight. The portfolio now has 55% in equities: 32% U.S., 10% Europe, 5% Japan, and 8% emerging markets. The firm cited concerns that higher energy prices and geopolitical risk will weigh on earnings and valuations.
- Bonds: Upgraded to overweight, with 25% in core fixed income (20% government bonds, 5% agency mortgage-backed securities). U.S. Treasurys are highlighted for their diversifying properties and historical performance during oil shocks.
- Cash: Increased to 11% of the portfolio, described as "the highest it's been in years," to wait for better opportunities.
- Other Assets: 5% in other fixed income (including high yield and emerging market debt) and 4% in commodities.
The strategists also noted that while Brazil is a bright spot, Asian emerging markets are dependent on Middle Eastern oil and gas supplies, adding to regional risks.