Investors Advised to Seek Safer Hideaways in Late-Cycle Market Environment, says Morgan Stanley
According to a note from Morgan Stanley analyst Andrew Pauker, as economic activity reaches its peak, investors should consider defensive sectors such as health care and utilities as safer options in the market. Pauker suggests that current leading macro data and the internals of the equity market indicate a late-cycle market environment. To play this market, Morgan Stanley recommends a “barbell” approach consisting of traditional defensive stocks, select growth opportunities, and late-cycle cyclical names. Pauker points out that this investment strategy has historically outperformed the broader market during late-cycle regimes. However, he emphasizes the importance of a stock-picking approach due to the high level of stock-specific risk in both the overall market and defensive growth and late-cycle cyclical names.
Morgan Stanley’s favorite stocks in this slow-growth environment include:
1) Traditional Defensives:
– Health care: Despite underperforming against the broader market year-to-date, health care is still Morgan Stanley’s preferred defensive sector. The firm favors large caps in this sector, considering it a “late cycle outperformer” due to its growth properties and historical outperformance in late-cycle periods and during falling inflation. The sector is expected to have higher earnings revisions, attractive relative valuation, and overweight rating by the firm. Walmart is among the top picks in this sector, with its shares showing a 15% gain this year and ongoing growth driven by its core grocery business and margin expansion. Another preferred defensive play is Thermo Fisher Scientific, a life sciences company. Despite near-term challenges, Morgan Stanley anticipates the industry’s long-term fundamentals to support the company’s return to growth in the 4% to 6% range over time. Keurig Dr Pepper, CenterPoint Energy, and Costco are among the other listed stocks in this category.
2) Select Growth Opportunities:
– Morgan Stanley analysts rate these defensive and lower volatility growth stocks as overweight. The companies in this category offer a balance of relative performance stability and attractive growth properties. Costco and Colgate-Palmolive are mentioned again in this list, along with Yum Brands and McDonald’s. UnitedHealth Group and Eli Lilly are also included as growth-oriented health-care names, benefiting from advancements in artificial intelligence and machine learning.
3) Late-Cycle Cyclicals:
– Marathon Oil, Valero Energy, and ConocoPhillips are energy companies that can thrive in a late-cycle market environment, according to Morgan Stanley. Marathon is highlighted for its high levels of free cash flow and total return yields, while ConocoPhillips offers strong free cash flow generation and cash returns to investors. Knight-Swift Transportation, Northrop Grumman, Howmet Aerospace, and Delta Airlines are also mentioned in this category.
Investors are advised to conduct thorough stock-specific research and analysis to mitigate stock-specific risks and maximize potential returns in this late-cycle market environment. Morgan Stanley’s recommendations are based on their assessment of the current market conditions and historical performance patterns.
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