- Morgan Stanley is updating its recession-investing playbook to reflect the unfolding recovery in economic activity.
- According to chief US equity strategist Mike Wilson, so-called cyclical stocks that benefit during the early stages of recovery are poised to continue gaining ground.
- He shared three sector recommendations and many more stock picks that would help investors position for this shift.
- Click here for more BI Prime stories.
As restrictions due to the coronavirus pandemic ease across the country, Morgan Stanley is recommending that investors do the same loosening in their portoflios.
Chances are you’ve already missed out on some of the stock market’s recent gains if your strategy has been to remain hunkered down as if we’re still in February or March. Back then, at the onset of the crisis in the US, it was prudent to buy defensive sectors like consumer staples and utilities because of their resilience.
It is now time to adjust by shifting to cyclical stocks and sectors that are best-suited for the early stages of a recovery, says Mike Wilson, the chief US equity strategist at Morgan Stanley. Such stocks are already outperforming defensives amid signs that the economy is reopening faster than the worst-case scenarios had stipulated.
“If we take the historical cyclical playbook, our expected V-shaped recovery implies a sustained period of cyclical outperformance ahead,” he said in a recent note to clients.
For this playbook to succeed, the same ingredients that aided it in the past must combine again — and Wilson expects that this time will be no different.
He sees inflation recovering next year as demand for things that the pandemic had put on hold increases. Higher spending should translate to an improvement in overall gross domestic product. These conditions would imply that consumer confidence is stronger and lost incomes are recovering. Manufacturing activity as measured by the Purchasing Managers’ Index is also expected to improve.
“Our review of history says that acceleration in key variables — inflation, consumer confidence, PMIs, and GDP growth — will be needed to sustain upside, and we think that the recovery from this recession and the associated policy response may bring that state of the world into being,” Wilson said.
In order to position for these improvements and their subsequent impact on cyclical stocks, he made three key top-level changes to sector weightings. He also screened for suitable stock picks within his favored sectors to provide more granular recommendations. These stocks and their parent sectors have historically improved alongisde the variables outlined above.
- Upgrade industrials and materials to overweight from equal-weight. The aircraft-makers Textron and Raytheon Technologies are among the industrials stocks that passed Wilson’s screen. LyondellBasell Industries, CF Industries Holdings, and Freeport-McMoRan are materials picks.
- Upgrade consumer discretionary stocks to equal-weight from underweight. Ford, General Motors, Under Armour, and iRobot fit this bill.
- Downgrade consumer staples to underweight from overweight.
Not all cyclical stocks or sectors are created equal, Wilson cautions. He is particularly wary of so-called “new economy cyclicals” like makers of technology hardware and semiconductors because of their rich valuations on a price-to-book basis.
Old-school cyclicals, on the other hand, have underperformed for the better part of the last decade, making them cheaper plays for the unfolding recovery.
Read more:
- The head of BlackRock’s $2 trillion ETF-investing business told us the 3 biggest growth opportunities on his radar — and explained how to start taking advantage of them now
- Baillie Gifford cashed in on Amazon and Tesla before the vast majority of investors. A 33-year partner at the firm breaks down a risk that scares him more than the pandemic — and details 3 stocks he’s buying for the new era.
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