Morgan Stanley U.S. equity strategist Michael Wilson, among the first Wall Street pundits to correctly assess the sustainability of the post-March equity rally, is now warning clients against the current work-from-home-related market winners in favour of neglected materials and industrial stocks.
In his Weekly Warmup report, Mr. Wilson noted that investments in companies able to operate relatively close to normal during the pandemic – notably large-cap technology – have been the big winners so far in 2020.
At this point, however, the strategist sees that “expectations are high and comparisons difficult” for these companies and disappointments in terms of revenue and profit growth are becoming more likely in 2021. Stocks like Zoom Video Communications Inc., for instance, will continue to benefit from lockdown conditions, but it’s highly unlikely they will ever see a year-over-year growth surge like 2020.
Morgan Stanley believes that companies that operate in sectors where demand has been hit hardest by COVID-19 are set to outperform. Growth expectations for these firms remains low, easier to beat, and in many cases, pent-up demand will help quickly push profitability back to pre-pandemic levels.
The potential for U.S. fiscal spending on infrastructure after the presidential election has Mr. Wilson very optimistic about industrial and materials stocks. He is particularly positive on the outlook for copper miners.
In the short term, the strategist believes U.S. equity markets will trade in a narrow range, and that investors should take advantage of any weakness to allocate assets to companies that will be the biggest beneficiaries of a full reopening of the North American economies.
-- Scott Barlow, Globe and Mail market strategist
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