- Mike Wilson, Morgan Stanley's US equity chief, shares three investing strategies that should be able to give investors an edge in 2020.
- Wilson has taken a bearish stance in recent years and isn't betting the US economy or the market will get substantially stronger.
- US stocks have made big gains in December as trade optimism grew and recession fears faded, bringing major indexes to all-time highs.
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It's mid-December and investors are already getting a lot of what they wanted for the holidays, which raises the question of what's next.
Mike Wilson, Morgan Stanley's chief investment officer and chief US equity strategist, has some ideas about that. He's long been bearish on stocks, and while he isn't betting on a dramatic improvement in the stock market or global economy - but he still thinks the right tactics can create an edge.
"We see some risk of disappointment in the [economic] data as we see payback for demand pull forward ahead of tariffs and margin pressures in the US," he wrote in a note to clients. "However, we think central bank liquidity and the removal of tail risks are offsetting forces that should support equities in the near term."
In a recent client note, Wilson shared three strategies his team has formulated for beating the market in 2020. They are as follows:
(1) Value in growth
Wilson says investors can bet on growth without investing in stocks that have already gotten too expensive.
"As economic growth has slowed, the price investors are willing to pay for durable growth has risen, making it hard to find value within growth," he wrote.
He's recommending companies with strong returns on invested capital since the Global Financial Crisis, and price-to-earnings growth ratios that reflect low long-term growth forecasts. All of those companies have market capitalizations of at least $5 billion, and none are cyclicals. They are also all rated "Overweight" by Morgan Stanley.
His top recommendations in that field include Facebook, Take-Two Interactive Software, Advance Auto Parts, Lowe's, Baxter International, Cigna, ResMed, and Alexion Pharmaceuticals.
(2) Cheaper cyclicality
As trade war and recession fears have faded, companies whose fortunes are linked tightly to the economic cycle have unsurprisingly done better than the rest of the stock market. But Wilson says it's still possible to find a few that are relatively inexpensive.
So he's pulled together a list of companies whose relative valuations are low compared to the broader market and to their own histories, but have high ratings from analysts, including "Overweight" ratings from Morgan Stanley.
Examples include BorgWarner, Ford, General Motors, Harley-Davidson, Lear Corp., PVH, Las Vegas Sands, and Norwegian Cruise Line Holdings.
(3) Trade upside
Finally, Wilson says it's possible that a long pause in trade tensions will lead to some improvement in global economic growth. That's going to help companies that make a lot of their sales overseas, so he's listing companies with high foreign revenue exposure and a low forward price-to-earnings ratios over the last five years.
All of those are rated "Overweight" or "Equal-weight" by analysts at his firm, and those include Lear Corp., Levi, Las Vegas Sands, Wynn Resorts, eBay, Philip Morris, and Colgate-Palmolive.