Stock markets continue to show large fluctuations
Morgan Stanley advises to position themselves defensively
Real estate, healthcare and utility sectors recommended
The situation on the markets remains fragile. “Interest rates and inflation remain the two bogeys on the markets,” said portfolio manager Thomas Altmann from asset manager QC Partners to the German Press Agency recently in view of falling prices. “And concerns are growing that high inflation will not only lead to stagflation, but also to a recession in combination with rising interest rates.” This is also consistent with the fact that the OECD recently corrected its growth forecast for the global economy downwards. The Bundesbank followed a few days later: it even reduced its growth forecast by more than half due to the consequences of the Russian war of aggression against Ukraine.
International stock markets remain in turmoil
No wonder that the mood on the stock markets is correspondingly tense. Numerous important indices such as the DAX, Dow Jones Industrial and S&P 500 have already suffered double-digit losses since the beginning of the year. According to various experts, it is not yet certain that there will actually be a recession. The US investment bank Morgan Stanley only assumes an economic downturn in its Bren scenario. Nevertheless, the risk of a recession has increased significantly over the next twelve months, as the financial institution explained in its May report. The bank believes that the cause is the exploding energy prices, which could cause the price of oil to rise to US$150 per barrel, and the strong US dollar.
That’s what Morgan Stanley says when volatility is high
Whether or not a recession hits, with stock markets so volatile, there are a few things investors can do to make their portfolios more defensive and hedge against market turmoil. In its US market outlook from mid-May, Morgan Stanley recommends concentrating on the three sectors of health care, real estate and utilities, as reported by CNBC. As the bank argues, “With the exception of energy, all of the well-performing industries have come out of the defensive end of the spectrum. While we don’t believe defensive stocks will have a strong run in terms of absolute performance, they offer relative protection as we expect the lower revenue and earnings to hit cyclical stocks harder.” The advantage of defensive stocks is stable dividends and income, even when the stock markets are volatile. Cyclical stocks, on the other hand, are more likely to be influenced by the state of the economy.
Health, real estate and supply recommended in the crisis
The bank recommends the healthcare sector, as this is currently not very expensive compared to other defensive stocks. Morgan Stanley prefers large pharmaceutical and biotech companies because they are currently being offered at attractive prices. They would also promise relatively good dividend yields.
In the real estate sector, the investment bank relies primarily on REITs, which would protect against downturns on the market with “stable cash flows”. They could also protect themselves against high inflation through “rental agreements, rent increases or real estate appreciation”, which may be particularly interesting given that US inflation has recently reached a 40-year high. In addition, the real estate sector can look back on a strong performance over the past year. It was up 42 percent, according to Morgan Stanley, beating the broader US market by 16 percent.
According to Morgan Stanley, there is also little upside potential in the utilities sector, but the industry would offer protection in uncertain times: “As almost all industries are struggling with the effects of rising energy costs, the pricing structure in the utilities sector should counteract the high cost environment provide relative protection,” according to the US bank.
But that’s not all the tips that investment strategists have for investors. In addition to the three sectors mentioned, the financial institution also recommends buying investment-grade bonds: “Now that we are deeper in the late cycle, we favor quality over junk. Since November 2021, when a shift towards a more hawkish Fed was on the horizon.” , we have seen a sustained outperformance of quality versus junk.”
Last but not least, one thing applies to investors in times of crisis: stay calm. According to CNBC, Wells Fargo market strategist Sameer Samana summarizes that a recession requires “extra patience”. After all, a bear market can last a whole year, which is why market participants would do well to “shift down a gear”.
Editorial office finanzen.net
Image sources: Victor Moussa / Shutterstock.com, Inked Pixels / Shutterstock.com