Morgan Stanley Wealth Management is reportedly completely slashing investments in high-yield or junk bonds amid fears of the impact of forthcoming tax cuts in the US.
The bank said legislative approval for tax cuts in the US may only provide temporary respite and may prove damaging for companies in the long-term.
Last month US President Trump signed the “Tax Cuts and Jobs Act” under which tax rules for different entities are set to be impacted.
Morgan Stanley Wealth Management’s CEO, Mike Wilson reportedly said: “While the tax cuts just enacted in the U.S. may lead to better growth in the short term, they may also bring forth the excesses we typically see before a recession — which is something credit markets figure out before equities.
“We recently took our remaining high yield positions to zero as we prepare for deterioration in lower-quality earnings in the U.S. led by lower operating margins.”
Wilson added that investors should prepare for at least one correction in global stocks.
Even though the US bank does not anticipate a recession occurring in 2018, it said a high level of risk still persists.
The firm said tightening monetary policy coupled with weaker earnings and economic data could be reasons adding to higher risks of a recession.