(Bloomberg) - Investors should focus on a “late-cycle portfolio” of defensive stocks, industrials and energy, according to Morgan Stanley strategists led by Michael Wilson.
The market is in a late-cycle backdrop — a time when the Federal Reserve is expected to pause or reverse its hawkish policy stance — and more conservative equity factors, like high cash and low debt, have started to outperform, Wilson wrote in a note on Monday. He reiterated his view that stock markets are not yet reflecting the risk of a recession.
“As is typical in such periods, multiple expansion has moved ahead of where macro fundamentals dictate fair value to be, placing the burden on a growth re-acceleration and/or incremental policy support,”wrote Wilson, whose negative outlook on stocks hasn’t materialized yet this year.
Wilson recommends a “barbell” approach, with a mix of defensive growth, industrials and energy. Health care in particular should do well, given its defensive and growth properties, especially after it underperformed the market this year, he added.
US equities have been on shaky ground since the start of August, but are still up 16% this year on expectations that the US economy will achieve a soft landing and the Federal Reserve will stop hiking rates. That narrative has been challenged by resilient economic data and relatively hawkish comments from Fed officials.
Some, like Deutsche Bank AG strategists Parag Thatte and Bankim Chadha, see the August pullback as part of a typical stock-market pattern. While another drop of over 5% would “not be surprising,” the strategists note that investor positioning in US stocks is now close to neutral, unlike in July, when it was stretched.
By Michael Msika
