Stock markets across the globe are keeping a close eye on monetary policy tightening by central banks as we enter the new year. Amid policy tightening and an expected deceleration in growth, analysts at Morgan Stanley said that large-cap stocks are still turning out to be the best play to help investors pocket healthy gains. The brokerage firm has been recommending US-listed large-cap stocks since mid-November last year. “…we think growth will decelerate this year as most of our leading indicators point to that outcome. Furthermore, this dynamic should be supportive of defensives outperforming cyclicals amid large-cap quality leadership,” they added.
Hawkish US Fed ahead
The United States Federal Reserve is expected to be more hawkish in 2022 as inflation continues to be a key concern amid the low-interest rate era. “On the first score, the Fed and other central banks appear to be determined to remove monetary accommodation in the face of higher inflation,” Mike Wilson, Chief Investment Officer and Chief U.S. Equity Strategist for Morgan Stanley said. He further added that mid-term elections in the US could make the US Fed more hawkish than expected.
Minutes of the Fed’s FOMC meeting held in December show that the US central bank could be more hawkish than expected. In the Fed’s December 14-15 policy meeting, policymakers said a “very tight” job market and rising inflation might require the US Fed to raise rates sooner and begin reducing its overall asset holdings as a second brake on the economy. These comments have since sent the NASDAQ down more than 3% while the Dow Jones slipped nearly 1%.
Where to invest
“Over the past nine months, the quality bias has driven more and more money into a handful of large cap growth stocks – further highlighting the importance of favoring large over small since March,” Mike Wilson said. Apart from large-caps, Mike Wilson advised investors to take a look at stocks that have already corrected but still offer good prospects at a reasonable valuation. “A few areas we think make sense to consider include consumer services and other businesses with pent up demand. In the more growth-y segments, we think biotech and China Internet are good bottom fishing candidates. Meanwhile, we would still be careful with very expensive tech stocks that remain unprofitable.” he added.
Among Defensives, the Morgan Stanley equity strategist said Health Care, REITS, and Consumer Staples tend to be the best performers in a decelerating but positive growth regime. Further, analysts also hold a positive view on financials. “We remain positive on financials as our sole cyclical overweight. A backup in rates is the reason, and that could be happening now,” Mike Wilson added.
Suggesting a barbell approach, Mike Wilson said that in 2022 investors should stick with a large-cap defensive quality bias, but balance it with financials and small mid-cap value stocks.