LONDON (Reuters) - Morgan Stanley's cross-asset strategy team upped its allocation to U.S. equities on Wednesday, saying better global growth and low interest rates can continue to support a market that a growing majority of investors are finding expensive.
While valuations for U.S. stocks appear extended on some measures, Morgan Stanley said brightening sentiment after a market-friendly outcome in the French election and low volatility suggest investors should be adding risk to portfolios.
According to the U.S. broker, option pricing shows the probability of a 15 percent rally on the S&P 500 from current levels is the lowest it has been in the last 12 years.
Morgan Stanley recommends investors take advantage of cheap options and buy calls on the S&P 500 to get in front of brightening sentiment while also limiting potential downside.
Globally, Japanese equities were the broker's most favored market while emerging markets were least favored.
Reporting by Vikram Subhedar, editing by Nigel Stephenson