Morgan Stanley (NYSE: MS) is getting defensive heading into 2020.
According to the firm, trade tensions are likely to spill over into next year and the 2020 U.S. presidential election will throw even more uncertainty into the aging bull market in the new year. Considering that, the bank says defensive stocks and consumer staples look more attractive now.
Michael Wilson, Morgan Stanley’s chief U.S. equity strategist, wrote in a note to clients that expectations of “disappointing” S&P 500 earnings next year should lead to companies like Coca-Cola (NYSE: KO), Lowe’s (NYSE: LOW), and McDonald’s (NYSE: MCD) to outperform the broader market in 2020.
“Trade, the election, and a late cycle economy keep the market searching for new leadership amid high uncertainty,” Wilson wrote. “We expect the market to vacillate between pro-cyclical outcome and a defensive one as data comes in and trade tensions and the election evolve. We slightly favor the more defensive outcome given our well below consensus forecast for S&P 500 earnings growth next year.”
Morgan Stanley says GDP growth will stabilize under 2% in the U.S. next year, with labor costs accelerating, both circumstances that could pose headwinds in 2020.
Wilson reiterated his target for the S&P to end next year at 3,000, nearly -4% below where the index is now. This forecast makes the firm one of the most bearish on Wall Street as the median projection calls for the index to increase by 5.9% to 3,325 by the end of 2020.
The equity strategist says his bearish projection for U.S. equities for the coming year comes even despite easier monetary policy and hopes of a resolution to the U.S.-China trade war.
Wilson wrote that central bank liquidity and positive seasonal data could boost the S&P 500 to overshoot the top end of his bull case for 2020, and he says that by next April, the liquidity tailwind should fade and the market will turn to focus on fundamentals.
“Uncertainty means rotations should continue and their durability will depend on whether growth is accelerating or decelerating,” Wilson wrote in the note. “With the S&P 500 currently above the upper end of the channel due primarily to excessive central bank balance sheet expansion, we think risk reward skews lower, and would prefer to be more opportunistic when adding risk.”
Wilson says that companies like Lowe’s and McDonald’s offer better-than-average free cash flow and earnings potential, though of the three stocks, Wilson’s top pick is Coca-Cola.
According to Wilson, the beverage maker offers “clearly superior topline growth vs. large cap CPG peers, driven by stronger pricing power, strategy changes, ramping innovation, and momentum in emerging markets, which we believe is not reflected in its current valuation.”