Morgan Stanley says these 4 defensive names are buys right now.
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Morgan Stanley’s (NYSE: MS) Mike Wilson just warned investors to ditch growth stocks in favor of defensive names.
According to Wilson, who is the firm’s chief U.S. equity strategist, “demand destructive” tariffs are stoking recession fears and defensive bond proxies will outperform growth names by 10% as the trade war between the U.S. and China continue to weigh on consumer sentiment, adding to a long list of recessionary indicators that are already flashing red.
“At the end of a growth scare when recession fears emerge, secular growth stocks typically underperform defensives,” Wilson wrote in a note to clients early this week. “Slowing job creation and slowing hours worked, stock market volatility and new tariffs are all potential weights on consumer spend.”
The trade war escalated over the weekend when tariffs on $112 billion worth of Chinese goods went into effect. This round of tariffs included everyday grocery items and household staples, which could potentially cost the average American household upwards of $1,000 per year, according to an analysis by JPMorgan (NYSE: JPM).
While things have calmed down a bit this week as the two countries finally settled on restarting trade negotiations early next month, the tit-for-tat trade war roiled markets last month while the bond market flashed recession warnings with the yield curve between the 2- and 10-year notes inverting mid-August.
“Since the consumer is 70% of the economy, the overall impact on the economy could be greater for this round… Keep in mind that last year’s first round of tariffs happened when companies were still enjoying a massive profits/margin windfall from the tax cuts. With that windfall now gone, the ability to eat the tariffs is much lower today,” Wilson said in the note.
Wilson, who called the earnings recession this year, has said that he believes the U.S. economy could fall into a recession if the trade war continues to escalate.
The expert strategist recommends clients short the Nasdaq 100, which includes many secular growth names, and go long the S&P 500.
Wilson also says investors should go long on defensive stocks, and Disney (NYSE: DIS), Coca-Cola (NYSE: KO), NextEra Energy (NYSE: NEE), and Procter & Gamble (NYSE: PG) are a few of the names on the firm’s buy list.
Of these names, Wall Street analysts are most bullish on Disney, which has a big catalyst with its new Disney+ streaming service coming up later this year. Analysts’ average price target for DIS is $149.88, indicating possible upside of 7.95% over the next twelve months.
Morgan Stanley rates Disney shares a Buy and last month set their price target for the stock at $160 – 15% higher than Thursday’s closing price.