Traders ought to hunt down safer hideaways available in the market as financial exercise reaches its peak — and defensive sectors, reminiscent of well being care and utilities, are the very best spot for that, in keeping with Morgan Stanley. “The main macro knowledge means that we’re in a late cycle market atmosphere as do the internals of the fairness market,” analyst Andrew Pauker wrote in a Tuesday notice. To play this market, the agency beneficial a “barbell” of conventional defensive shares, some choose progress alternatives and late-cycle cyclical names. “According to the historic precedent, the mixture of those cohorts has outperformed the broader market in the course of the present late cycle regime, which started final yr,” Pauker mentioned, including that this funding technique ought to supply relative efficiency upside. To make sure, he beneficial a stock-picking method, saying there stays a excessive degree of stock-specific threat for each the general market and for defensive progress and late-cycle cyclical names. Have a look under for a few of Morgan Stanley’s favourite shares on this slow-growth atmosphere. 1) Conventional Defensives Regardless of its year-to-date underperformance towards the broader market, well being care stays Morgan Stanley’s most well-liked defensive sector. The agency, which prefers giant caps within the sector, views the group as a “late cycle outperformer” given its progress properties and historical past of outperforming in late-cycle intervals and through falling inflation. In line with Pauker, earnings revisions for the sector have turned greater and relative valuation stays engaging, notably for biotech and pharmaceutical names, in addition to health-care suppliers and companies. Every of the listed shares are rated chubby by the agency. Walmart is one in all its prime picks. Shares have gained 15% to this point this yr, and have continued within the inexperienced this quarter. The agency expects this mega-retailer to indicate accelerating EBIT progress, with ongoing share beneficial properties pushed by its core grocery enterprise and margin enlargement from its rising revenue streams and provide chain. Amid inflationary pressures, Walmart’s low costs have retained lower-income shoppers and attracted extra high-income customers , who made up roughly half the corporate’s market share beneficial properties in meals within the fiscal quarter that resulted in January. One other favourite defensive play is life sciences firm Thermo Fisher Scientific . Regardless of near-term challenges, Morgan Stanley mentioned it expects the trade’s engaging long-term fundamentals to assist the corporate’s return to progress within the 4% to six% vary over time. Thermo Fisher missed forecasts on Wednesday, sending its inventory to a two-year low. It expects a tougher first half of 2024 earlier than seeing average core natural income progress within the second half. Thermo Fisher mentioned its pandemic-related income, which included testing and vaccines, is more likely to be a headwind. Nonetheless, Morgan Stanley is optimistic on the inventory, saying “we see TMO as among the many finest positioned throughout the sector to drive above-peer/-market progress … given the mixture of a resilient and diversified enterprise mannequin, robust operational observe file, best-in-class [management] group, concentrate on innovation … and embedded capital deployment optionality.” Beverage firm Keurig Dr Pepper , utility CenterPoint Power and wholesale retailer Costco had been among the many different names that made the lower. 2) Choose Development Alternatives These defensive and decrease volatility progress shares are rated chubby by Morgan Stanley analysts, who say these firms supply a “stability of relative efficiency stability together with engaging progress properties.” Costco and toothpaste vendor Colgate-Palmolive once more made this checklist, with analysts liking the broader shopper staples sector for its constant file of late-cycle outperformance and the group’s year-to-date underperformance. In line with the agency’s shopper analysis, demand stays robust for staples reminiscent of groceries and home goods, benefiting these names, whereas demand continues to weaken in discretionary spending classes, like attire. Nonetheless, fashionable shopper meals firms Yum Manufacturers and McDonald’s are thought-about progress shares based mostly on their market cap and volatility. Each are within the purple for the yr. Different growth-oriented defensives embody health-care names UnitedHealth Group and Eli Lilly . Analysts famous that synthetic intelligence and machine studying developments current a chance to advance the sector. 3) Late-Cycle Cyclicals A number of power firms — together with Marathon Oil , Valero Power and ConocoPhillips — can shine in a late-cycle market atmosphere, in keeping with Morgan Stanley. Morgan Stanley analyst Devin McDermott mentioned that of the agency’s protection, Marathon provides one of many highest ranges of free money stream and whole return yields with dividends and buybacks at 13% and 10%, respectively. He added that ConocoPhillips, which additionally provides robust FCF technology and money returns to traders, has an “engaging worth proposition within the present commodity worth atmosphere” given the latest rally in oil costs. Freight transportation firm Knight-Swift Transportation is one other favourite. Shares are down 5.6% for the yr. “KNX is our prime decide as a consequence of their scale and publicity, structural enhancements in [full truckload] and up to date idiosyncratic catalysts from the USX integration and [less-than-truckload shipping] publicity,” analyst Ravi Shanker mentioned in regards to the inventory. “We proceed to see normalized EPS at $4 (+$1 for the USX acquisition) nicely above what’s at the moment priced into the inventory and anticipate elevated investor curiosity with definitive proof of an upcycle.” Protection large Northrop Grumman , Howmet Aerospace and Delta Airways additionally made the checklist.