Is Now The Time To Invest In Defensive Stocks?


In recent months, there was a release of pent-up demand by consumers, fueling a rapid recovery.

As this euphoria fades, defensive stocks will outperform relative to the broader market, according to Morgan Stanley. 

Analyst Michael Wilson named five reasons why he believes defensive stocks are a smart move for investors.

Related Link: Best Consumer Defensive Stocks Right Now

1. Consumer Overconsumption: There is no denying the U.S. is seeing a strong reopening and pent-up demand for pandemic-restricted activities, such as dining out, which will likely continue to benefit from spending, said Wilson in a Monday note.

Industries that positively correlated with stay-at-home orders, such as home improvement and general merchandise, saw a pull-forward in demand that will likely degrade in the near term, the analyst said. 

2. Disposable Income is Low: June's retail numbers came in higher than expected, leading to a logical conclusion that pent-up demand for in-person shopping experiences will continue to drive discretionary spending, he said. This view does not account for disposable income levels, Wilson said. 

Since the last round of stimulus checks, personal disposable income has fallen, according to Morgan Stanley.

Consumer spending is trending alongside disposable income, indicating June's retail sales numbers are "likely the last in a long series of above-trend consumption data points," the analyst said. 

3. Inflation Worries Crowding Out Consumers: June's University of Michigan Consumer Survey saw record levels of inflationary worries regarding home and vehicle prices, said Wilson.

The survey indicated high prices might impact demand in retail markets, the analyst said, further hampering future retail growth in discretionary spending.

4. Consumer Staples Set To Shine: Wilson specifically highlighted the consumer staples as a key point of interest, upgrading the sector from Neutral to Overweight in a Monday note. 

Consumer staples are poised to benefit as investors turn defensive, given their more intrinsic value-ascribed market caps.

Related Link: Best Consumer Staples ETFs Right Now

5. Tech Outlook: The Morgan Stanley analyst provided insight into tech names as well. The pandemic accelerated trends in the industry, leading to high and sustainable growth rates, said Wilson. Specific tech names also benefited from one-time demand surges as the world adopted widespread digitalization, he added.

Further, tech's gains have lately been driven by large-cap, profitable names like FAANG stocks rather than unprofitable growth companies, said Wilson.

Trade Idea: Morgan Stanley consumer staples analyst Dara Mohsenian offered insight into why the firm is bullish on Mondelez International Inc MDLZ.

The company trades at a discount to other mega-cap consumer staples companies and has sustainability accelerated growth to 4%, said Mohsenian.

Mondelez's favorable geographic exposure, strategic branding, investment in supply chain optimization, and topline post-COVID-19 recovery paint the company as a solid defensive investment candidate, said the consumer staples analyst.

Related Link: Best Monthly Dividend Stocks

Photo: Courtesy of Mondelez.

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Posted In: Analyst ColorAnalyst RatingsTrading IdeasDara MohsenianMichael WilsonMorgan Stanley
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