Morgan Stanley warns investors are in more danger of a market crash than they realize and identifies the best stocks in a sheltered sector
- Morgan Stanley has upgraded utilities to "overweight" as it forecasts that bond yields have peaked for now.
- The sector, a bond proxy, is considered a safe haven during market turmoil and becomes more attractive when bond yields fall because it pays out steady dividends.
- It's rallied in recent weeks even as the broader market sold off amid trade tensions.
One sector remained green as the stock market sold off on Monday: utilities.
The so-called bond proxy, preferred during times of turmoil for its steady dividends, gained 1.7% as the broader market fell on trade tensions.
The equity strategists at Morgan Stanley expect further weakness in the stock market, and have said a lengthy bear market may already be underway.
"We think it is still too early to go full-on defensive, but it is not too early to start moving in that direction," Michael Wilson, Morgan Stanley's chief equity strategist, said in a recent note.
"As a result, we are upgrading Utilities to overweight today [June 18] on the premise we are close enough to a top on 10-year Treasuries even if the final highs are not in. Morgan Stanley's Global Interest Rate strategy team thinks 10-year Treasury yields have topped for the cycle at its recent high of 3.12%."
Because it's considered a bond proxy, the sector's dividends would look more attractive to investors if Treasury yields fall, as Morgan Stanley forecasts.
Wilson added that the earnings-revision breadth for utilities, which gauges the number of companies revising future profits higher compared to those downgrading, moved higher over the past month. "Performance should begin to follow if even rates have not yet peaked," Wilson said.
The list below highlights the utilities stocks that are rated "overweight" by analyst Stephen Byrd. His price targets were published on Monday June 18, and most of the stocks have rallied since then.