According to Morgan Stanley Investment Management, investors are reducing their exposure to high-growth stocks amid expectations of a broad hit to company earnings from a looming global recession.
William Lock, head of international equity, and Bruno Paulson, portfolio manager of international equity at Morgan Stanley Investment Management, said they believe now is a “particularly good time” to own high-quality compounder stocks.
Companies with pricing power and recurring revenues, they add, would be resilient to global market volatility.
“High-quality compounder companies that can grow their earnings steadily in real terms across cycles are likely to out-earn the market, just as they have done over the last few decades,” the analysts observed.
“When supply normalises (or possibly even overbalances into excess supply), true pricing power comes into its own.
“Investing in companies with true pricing power is crucial because earnings should be relatively resilient in a squeeze on the wider market’s profitability.”
Among the high-quality compounder stocks listed by the analysts are consumer brands, mission-critical software services and quality-assured healthcare companies.
These companies, they noted, “possess strong intangible assets”, which are “generally difficult to recreate or duplicate by competitors”.
Morgan Stanley’s assessment comes as central banks persist with their monetary policy tightening strategies in a bid to curb inflation.
Higher interest rates are expected to slow consumer spending as borrowers grapple with heavier debt burdens.
Moreover, Morgan Stanley is forecasting further pressure on company earnings in the long term as companies employ strategies to strengthen their supply chains and as governments seek to “repair their finances” via higher corporate tax rates.
“Given the uncertain macroeconomic landscape and the room for policy errors, we continue to advocate for a portfolio of high-quality compounders,” Mr Lock and Mr Paulson add.
“The combination of these companies’ recurring revenues and pricing power should protect revenues and margins in a downturn, providing asset owners with earnings resilience and relative predictability through tougher, more volatile times.”
