Amid economic uncertainty in the United States, Mike Wilson, Morgan Stanley’s top U.S. equity strategist, has advised investors on Monday to focus on late-cycle stock sectors. This advice comes as part of a balanced portfolio approach that involves a combination of defensive growth sectors and late-cycle cyclicals.
Wilson’s strategy suggests that investors should maintain a balanced portfolio until more concrete economic data is available. The approach includes sectors such as healthcare and consumer staples, known for their defensive growth, coupled with late-cycle cyclicals like industrials and energy. Despite the underperformance of these sectors this year, Wilson emphasizes that it’s premature to shift investments towards small and mid-cap stocks. This is evident from the mere 4% rise in the RUT in 2023.
The energy sector has become an area of interest for investors due to rising prices, which recently neared $92 per barrel. Wilson identifies this sector as a frequent late-cycle performer, often driven by the strength of commodities. Factors such as robust oil demand, significant production reductions, and steady crude prices are seen as enhancing the sector’s performance.
This appeal of the energy sector is further underscored by its recovery from a period of underperformance that lasted from November of the previous year to July of this year. Currently, the sector offers attractive valuations and increased earnings revisions. It also generates substantial free cash flow and has the ability to repay debt if necessary. This resurgence occurs at a time when hedge fund exposure to the energy sector is unusually low.
Wilson highlighted several defensive growth stocks that have outperformed both annually and more recently. These stocks include NYSE:ACN Accenture (NYSE:), NASDAQ:AAPL Apple (NASDAQ:), NYSE:AZO AutoZone (NYSE:), Biomarin Pharmaceutical BMRN, and NYSE:BSX Boston Scientific (NYSE:). All these stocks are rated overweight by Morgan Stanley.
Most U.S. investors expect that large-cap winners will continue to dominate in the fourth quarter, provided the broader market remains stable. Wilson noted similar concerns among European and U.S. clients regarding the current stage of the economic cycle and performance disparities.
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