The advice for 2017 is clear: sell credit to buy equities – the opposite advice of a year ago, Morgan Stanley said in its latest global strategy outlook.
The investment advice indicates that the "Great Rotation" – the idea of shifting from bonds to stocks coined by Bank of America Merrill Lynch five years ago – is taking place. However, Morgan Stanley believes that the best equities are not in the U.S., as most investors seem to be favouring.
"I think this is also the time where you have maximum confidence in U.S. policy making. This is the moment where everything is possible and you can dream the Trump administration will do everything that markets like and none of the things that market won't like. And that is possible until the administration starts," Andrew Sheets, chief cross-asset strategist at Morgan Stanley, told journalists on Monday.
Expectations of higher inflation and of a shift towards fiscal expansion on the back of Trump's election pushed the Dow to record highs.
In the first week after Trump's election investors poured $28 billion into equities, the biggest inflows seen in two years, and bonds witnessed the biggest outflow in three and a half years of $18 billion, according to data from Bank of America Merrill Lynch.
But Morgan Stanley believes the market is "too optimistic". The investment bank forecasts higher global yields and dollar in the first quarter of next year and a tightening in financial conditions. The more upbeat markets are that the next U.S. administration will be market-friendly, the more likely it is that it will be disappointed, the bank states.
For example, confidence on further infrastructure investments could dissipate once projects are revealed, the bank said.
However, instead of looking at U.S. equities, Morgan Stanley believes both Japanese and European shares can offer higher returns.
"Europe is really easy to dislike and I actually think it works in its advantage," Sheets said.
"The political risk in Europe is there but it's well flagged," he added.