Analysts at this leading City bank have identified the highest-quality companies in their sectors. We highlight the UK shares that make the list.
Morgan Stanley’s line-up also features London-listed 3i Group (LSE:III), Ashtead Group (LSE:AHT), Endeavour Mining (LSE:EDV). London Stock Exchange Group (LSE:LSEG), Man Group (LSE:EMG), Spirax-Sarco Engineering (LSE:SPX) and SSE (LSE:SSE).
The bank believes the upswing in macro uncertainty suggests the three-year bear market in quality stocks has come to an end. Selection is based on the sustainability and quality of their business model and the opportunity to widen their competitive advantage.
It notes that quality stocks have been persistent outperformers within European stock markets for much of the last 30 years, with the last three years of underperformance “both a rare anomaly and a potential opportunity for investors to re-engage”.
“We have recently turned tactically cautious on the outlook for European equities, given the rising risk that economic activity and corporate earnings disappoint over the coming months as prior rate hikes continue to flow through the system and credit conditions incrementally tighten after recent events in the global banking sector. Against this backdrop we expect stocks with more defensive and quality characteristics to outperform.”
Supporting its view that quality stocks are reasonably priced, Morgan Stanley said average relative valuations for the MSCI Europe Quality index are below their 10-year average.
On Compass, the bank has a price target of 2200p as it believes that various favourable structural factors in institutional catering will provide a runway for sustainable growth.
It also sees no barrier to Compass returning to or even exceeding its pre Covid margins, perhaps as soon as 2024, and for the company to hand a cumulative £5 billion to shareholders by 2025 equivalent to more than 20% of its current market cap.
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Meanwhile, drinks giant Diageo is regarded as a core quality holding for the long-term.
The bank points to a track record of strong execution, capital allocation and efficient cost management, boosting expectations for superior top and bottom-line growth.
It notes that the Guinness and Smirnoff maker has actively strengthened its portfolio and geographic footprint, particularly in its fastest-growing categories and price segments.
The support for Experian, alongside a price target of 3,230p, reflects the view of Morgan Stanley analysts that the credit checking firm is a big data play.
It adds: “Digitisation, along with data assets, makes Experian one of the most powerful organic growth stories in the sector.”
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One of the biggest share price upsides on the list is for London Stock Exchange, which boasts a price target of 10,100p. The bourse trades on 14 times underlying earnings for 2023, which is among the cheapest exchanges globally based on a sector average at about 17.5x.
This is despite attractive revenue growth and profitability prospects. Morgan Stanley added: “We view the revenue mix at LSEG, with a higher gearing to data revenues and to recurring/subscription revenues, as appealing in the context of European peers more exposed to transactional volumes.”
The other stocks on the list are Air Liquide (EURONEXT:AI), ASML Holding (EURONEXT:ASML), BioMerieux (EURONEXT:BIM), CaixaBank (XMAD:CABK), Cellnex Telecom (XMAD:CLNX), Coloplast (XETRA:CBHD), Dassault Systemes (EURONEXT:DSY), Deutsche Telekom (XETRA:DTE), Edenred SA (EURONEXT:EDEN), Intesa Sanpaolo (MTA:ISP), Lonza Group Ltd (SIX:LONN), L'Oreal (EURONEXT:OR), Michelin (EURONEXT:ML) Munich Re, Nestle SA (SIX:NESN), Norsk Hydro, Novo Nordisk (XETRA:NOVC), Orsted, Compagnie Financiere Richemont SA (SIX:CFR), Scout24 (XETRA:G24), Swisscom (SIX:SCMN), Technip Energies (EURONEXT:TE), TotalEnergies (EURONEXT:TTE), Universal Music (EURONEXT:UMG).
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