Morgan Stanley Urges Pulling Back on Japan

Global investors should reduce their stock holdings in Japan and emerging markets because record cash inflows threaten to make those markets too expensive, Morgan Stanley told clients this week in a report. It recommended channeling more assets into U.S. equities.

The brokerage advised its clients to make “a significant shift” in their global allocations by reducing Japanese equities by a third, to 10% of assets, and slashing emerging-market equities by half, to 5%.

The firm also lifted U.S. equities to “overweight,” recommending that investors raise their holdings by 10 percentage points, to 55% of assets.

Heavy cash inflows “are approaching the point of pushing Japan and emerging markets beyond fair value, creating the relative value opportunity in the U.S.,” the brokerage said.

Japan’s market surged 40% last year and is up 2.7% this year. Among emerging markets, Brazil jumped 28% last year and is up 9.3% this year; the Indian market rose 42% last year and is up 7.3% year to date.