Morgan Stanley flips on Europe as continent counts cost of Iran war
Morgan Stanley Investment Management is rotating from being overweight to underweight Europe, with higher energy costs set to continue to bite in the continent and dent growth measures, despite the Middle East ceasefire deal easing oil prices on Wednesday. Jim Caron, the firm’s chief investment officer for cross asset solutions, said it is rebalancing its portfolios with a tilt towards being overweight the U.S., a shift he acknowledged is counter to where consensus was at the start of the year. Caron said Europe now faces a much stiffer headwind going forward as a result of the Iran conflict , thanks to deeper inflation impacts and elevated energy costs, which, he said, would hamper the continent’s earlier positive momentum. Fiscal stimulus packages in several European countries, particularly Germany, will be rerouted from growth measures and instead used to cushion the impact of the shock, he said. .STOXX 1M mountain Stoxx 600. The continent had earlier benefited from the so-called “Sell America” trade, as investors reduced exposure to U.S. assets following the turmoil stemming from President Donald Trump’s sweeping “Liberation Day” tariff announcements in April 2025. But the Iran war has forced a rethink among investors, Caron said. “We were positioned to think that Europe would continue to have more positive momentum… Europe was in a sweeter spot trying to rebalance between the U.S. and China,” Caron said on Wednesday during a webinar on the global investment landscape. “Now they are going to have this exogenous shock — higher oil, higher energy prices — which will be residual but it may not decline as much because of the supply destruction that’s taken place.” The resilience in the U.S. will, in contrast, be much more attractive, and “much more fortified,” he added. @LCO.1 1M mountain Brent crude. Oil prices have tumbled since a two-week ceasefire between the U.S. and its allies and Iran was announced late Tuesday. Brent crude , the global benchmark, slumped more than 15% Wednesday to $92.24 a barrel, while West Texas Intermediate prices plunged almost 18% to $92.67. However, Caron said prices will not return to between $65 and $70, as it was at the start of the year — and that will hit Europe harder than elsewhere. “European economies are much more sensitive to those energy prices. I think a lot of the stimulus that would have been earmarked towards growth will now be soaked up trying to buffer those energy prices. .SPX 1M mountain S & P 500. On Asia, meanwhile, he said that much of the focus is now centered on Japan. “Looking at Japanese banks, we are mildly overweight and we may increase that overweight and we may fund that out of Europe. Europe faces stiffer headwind. I would prefer to look more towards Asia. Japanese industrials is another sector we are looking at too ,” he said.
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