Morgan Stanley’s top five thematic trade ideas right now

• If you’re interested in finding new markets to invest in, take a look at Japanese stocks, and the industrial and healthcare sectors.

• If you want a trade idea that doesn’t rely on the overall market direction, you could go long India and Mexico while shorting emerging markets, or go short the euro versus the US dollar.

• If you want to add not just returns but also diversification to your portfolio, consider investing in long-term US Treasury bonds.

Morgan Stanley’s just dropped its 2024 forecast, and it’s a goldmine. I’ve prospected five of its hottest trade nuggets, each one aimed at turbocharging your portfolio. Because, hey, whether you’re hunting for fresh stock markets to dig into, chasing that elusive “alpha” to help you profit in any scenario, or just looking to diversify your portfolio, this update’s got trades for every objective.

Goal: Find new stock markets.

The first two trades are all about smart, selective stock investing. If your portfolio is mightily dominated by stocks from the US and Europe, or if it’s just overdue for a break from the high-octane tech sector, give these a look. They just might add some diversification to your portfolio and boost your returns.

Trade #1: Pick up some Japanese stocks.

Morgan Stanley is all about Japan’s TOPIX (Tokyo Stock Price Index), predicting a stellar 13% rise in 2024 – way shinier than the 4%-5% it’s predicting for stocks in the US and Europe. A revved-up economy, corporate reforms that are boosting companies’ return on equity, and a flood of foreign investors shifting from underweight on the country’s stocks to overweight are fuelling the optimism. The fact that Japan is less exposed to Asian growth hiccups and geopolitical drama doesn’t hurt either.

But there are two potential risks here to keep on your radar. If the Bank of Japan announces a big change to its monetary policy or if global growth falters, the Japanese yen could soar – and that could potentially put a squeeze on the country’s stocks. So keep an eye out for those shifts.

The JPMorgan BetaBuilders Japan ETF (ticker: BBJP; expense ratio: 0.19%) is a straightforward, cost-effective way of implementing this trade.

Trade #2: Add some industrials and healthcare.

Morgan Stanley’s cautious strategy leans toward safer, defensive sectors with appealing valuations. Healthcare sparkles here, historically excelling in late business cycle stages and in times of declining but above-average inflation – a scenario mix we’re likely to see in the coming months. Likewise, the industrial sector – which includes aerospace, defense, machinery, and building products – tends to thrive in late-cycle markets, though it tends to be more cyclical than defensive. It’s primed to gain from trends like automation, clean tech, near-shoring or on-shoring, and government stimulus. Both sectors are seeing a positive turn in earnings revisions and offer attractive valuations, both compared to other sectors and compared to their own histories.

Despite their defensive nature, these sectors aren’t recession-proof and could struggle if the economy faces a severe downturn. And, in a scenario where the economy gains momentum, they might lag behind more cyclical sectors on a relative performance basis.

You can invest in US industrial companies through the Vanguard Industrials ETF (VIS; 0.10%) and in US healthcare companies through the Health Care Select Sector SPDR Fund (XLV; 0.10%).

Goal: Make money in a way that doesn’t depend on overall market direction.

Those first two trades are all about betting on the economy’s direction, but the next two are “market neutral”. Market neutral trades typically involve simultaneously buying and selling assets, focusing on their relative performance instead of betting on the general direction of the market. Since they march to their own beat and are not closely linked to stocks or bonds, they could be smart, complementary additions to your portfolio.

Trade #3: Go long India and Mexico and short MSCI EM.

Morgan Stanley is taking a go-slow approach with emerging markets. The combo of a robust US dollar, higher financing costs, geopolitical jitters, and a reliance on Chinese growth could dampen corporate earnings across these regions. However, the investment bank remains bullish on two standout economies: India and Mexico. With its proximity to the US, Mexico is poised to cash in big on “nearshoring” – that is, the growing wave of businesses moving operations closer to home. India, meanwhile, is riding high on structural reforms, robust foreign direct investments, and a stable macroeconomic climate. By buying India and Mexico and shorting the broader emerging markets index, you’re effectively betting that those two markets will outperform the rest. This approach can yield profits as long as India and Mexico perform better than the broader market, so you could even make money in a sharp market downturn.

For Mexico, the main hazard lies in a potential downturn in government spending, coupled with infrastructure that might struggle under increased demand. In India, the 2024 general elections could stir up market turbulence. And it’s worth keeping an eye on China: a robust economic comeback there could boost other emerging markets, affecting positions where you’re betting against these economies.

You can implement the long end of this trade by buying the iShares MSCI India ETF (INDA; 0.64%) and the iShares MSCI Mexico ETF (EWW; 0.50%). For the short end, the best method is to short the Vanguard FTSE Emerging Markets ETF (VWO; 0.08%). If your broker won’t allow that trade, you could either buy an inverse ETF like the ProShares Short MSCI Emerging Markets (EUM; 0.95%) or go short using contract for differences. They are both possibilities – though both are imperfect and should only be implemented by more experienced investors and only over a relatively short horizon. Then again, if you have a positive view on stocks, you could simply choose to just implement the long end on its own, preserving all the directional exposure on the upside.

Trade #4: Go short EUR/USD.

Europe is facing tough times and a recession appears to be looming. Meanwhile, the US, while not exactly shining bright, seems to be in a slightly better spot. Thanks to the perceived higher quality of its companies and the dollar’s status as a safe-haven, the US could see a surge in investor interest if the global economic scene becomes any more gloomy. This shift would likely boost demand for both US assets and the dollar.

The risk here is that if Europe’s economy exceeds its very low expectations and the European Central Bank holds off on cutting rates, or does so less aggressively than anticipated, that could rekindle demand for the euro, and send it higher, relative to the US dollar.

Goal: Add diversification to your portfolio.

The next trade is not just about adding returns, it’s also about providing your portfolio with some balance.

Trade #5: Buy US 30-year Treasury bonds.

Interest rates have skyrocketed, causing a slump in the price of long-dated Treasury bonds. (Because bond prices fall as their yields rise). But in the same way that stocks were dirt cheap in the midst of the crisis in 2008, bonds are now in a tantalizingly attractive place, with their prices already factoring in challenges like a surge in Treasury supply, higher-for-longer interest rates, and more expansive fiscal spending. With the US economy cooling, inflation on a downtrend, and the potential return of a whole lot of investors who were scared away during the recent selloff, Morgan Stanley says the horizon looks bright for US 30-year Treasury bonds over the next few months. As yields drop, bond prices will climb, offering investors not just steady income but potential capital gains too.

The biggest risk here is that the economy remains resilient, leading investors to reassess their inflation and interest rates expectations, and nudge them higher.

You can invest in long-term bonds through the iShares 20+ Year Treasury Bond ETF (TLT; 0.15%).