The firm also said that investors should brace themselves for at least one market correction this year.

Morgan Stanley’s wealth management arm is no longer advising clients to hold positions in high-yield, or “junk”, bonds as it believes we could be heading towards a recession. 

As a result, the $2 trillion unit is slashing all junk bond allocations. Although tax cuts are expected to boost momentum in high-flying stocks, this may be short-lived and cover up balance sheet flaws, Mike Wilson, chief investment officer, said earlier this week. 

“While the tax cuts just enacted in the US 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,” he said in a note. “We recently took our remaining high yield positions to zero as we prepare for deterioration in lower-quality earnings in the US led by lower operating margins.” 

Perhaps ironically, Morgan Stanley Wealth Management’s move to ditch junk bonds comes at a time when their total returns continue to climb to record-highs. 

For example, the MSCI All-Country World index has spiked 1.6 per cent so far this week while the Bloomberg Barclays Global High Yield index jumped 0.4 per cent. Both are trading at new highs.

But investors should prepare for at least one market correction this year, according to Wilson. 

Though his firm does not anticipate a recession this year, it sees the risks rising. As monetary policy tightens and fewer positive surprises in earnings and economic data arise, any remaining upside is likely to be speculative, Morgan Stanley Wealth Management has suggested. 

“We think it will be much tougher to make money in 2018 and 2019 than in 2016 and 2017 as the risk of a recession and outright bear market comes closer,” Wilson wrote. “Late-cycle dynamics have become even more evident.”