Global equities came under more pressure after Morgan Stanley revised its investment guidance, citing heightened risks related to conflict in the Middle East. The bank shifted its evaluation of global stocks to ‘Equal Weight’ from ‘Overweight’, while boosting its preferences for cash and U.S. government bonds.
Strategists at Morgan Stanley pointed to ongoing uncertainties related to potential oil supply disruptions, saying the unpredictability of the oil market’s fallout has made risk assets less attractive. The price of Brent crude surged 59% over the course of the month, marking the most significant monthly rally since the 1990 Gulf War.
According to Morgan Stanley, if oil prices were to hover between $150 and $180 per barrel, global stock valuations could face nearly a 25% contraction. The bank also reduced its recommendations for both U.S. and Japanese equities, moving them to ‘Equal Weight’. Risks for Japanese shares were noted, with the firm anticipating potential stress from disruptions to supply chains and broader recessionary effects if the Strait of Hormuz remains blocked.
Despite this downgrade, Morgan Stanley highlighted that U.S. equities continue to stand out thanks to relatively stronger projected earnings-per-share growth compared to other regions.
Asset allocation trends have shifted noticeably since the outbreak of the Middle East conflict, reversing much of last year’s pattern when investors directed flows away from the U.S. towards other developed and emerging markets. Since hostilities escalated last month, capital has moved back into U.S. stocks and bonds, reflecting renewed confidence in the U.S. as a more defensive market.
Market sentiment soured on Monday as ongoing violence contributed to higher oil prices while dragging on global equities. The latest surge followed intensified fighting after Yemen’s Houthi forces launched drones and cruise missiles at Israeli targets, raising fears that the conflict could further disrupt shipping routes in the Red Sea.
Both principal crude contracts saw intraday gains above three percent, with Brent nearing $117 per barrel before paring some advances. Market anxiety was further stoked by comments from U.S. President Donald Trump, who stated in an interview that the U.S. could potentially target Iran’s crucial oil infrastructure, specifically mentioning Kharg Island.
Persistent oil price strength and concerns about a prolonged conflict have intensified worries over inflation and the broader global economic outlook, compounding downward pressure on equity markets.
