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MORGAN STANLEY: Buy these 20 stocks built to profit from a mounting inflation comeback that will alter the investing landscape

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  • A cocktail of forces led by populism is poised to reinject inflation into the US economy, according to Mike Wilson, the chief US equity strategist at Morgan Stanley. 
  • While he does not imminently expect inflation due to the recession, he says investors should start entering trades that would profit from higher consumer prices. 
  • He identified stocks that have displayed the highest correlation with inflation expectations over the past five years. 
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Inflation eluded the US economy nearly throughout the most recent expansion — but it is set to make a comeback during the forthcoming one, according to Morgan Stanley.

The bank's equity strategists see higher price levels potentially altering the investing landscape, and have formulated a strategy ahead of time. 

The team led by Mike Wilson is not expecting inflation to return imminently. After all, the US economy is still mired in a recession that is pushing prices lower. In April, a gauge of consumer prices that excludes volatile food and energy costs fell by the most ever, according to Labor Department data released on Tuesday. 

However, it is not too early to prepare an investing playbook that accounts for higher inflation because of all the catalysts that are lining up to trigger its return. The six forces listed below are "creating the most convincing case for a return of inflation we've seen in some time," Wilson said: 

1. The growing trend of populism that has ushered in inflationary policies like immigration controls and tariffs. 

2. Wage growth, "perhaps the most important trend of populism" due to minimum wage legislation that pressures compensation upwards. 

3. Nationalism, yet another byproduct of populism that brings about higher military spending and tariffs. 

4. A reversal of globalization that would increase costs as companies rearrange their supply chains to be more domestic. 

5. Structurally higher deficit spending due to the unprecedented stimulus that has been unleashed to fight this crisis. 

6. The big shifts in fiscal and monetary policy could lead to a weaker dollar

With these trends already in motion, Wilson and team analyzed stocks that have exhibited the highest correlations to the gauge of anticipated price changes known as the 5-year, 5-year forward inflation expectation rate. Specifically, they screened for Russell 1000 companies in each industry group with a top 5% correlation between their weekly returns and weekly changes in 5Y5Y inflation forwards over the last five years. 

"Inflation forwards have risen considerably off the bottom, opening room for a catch up in inflation levered equities," Wilson said in a note.  

The top 20 stocks are listed below in ascending order of their correlations with inflation expectations. 

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20. Westlake Chemical Corporation

Ticker: WLK

Industry Group: Materials

Absolute Correlation with 5Y5Y: 46%

Source: Morgan Stanley



19. Aflac

Ticker: AFL

Industry Group: Materials

Absolute Correlation with 5Y5Y: 46%

Source: Morgan Stanley



18. Helmerich & Payne

Ticker: HP

Industry Group: Insurance

Absolute Correlation with 5Y5Y: 46%

Source: Morgan Stanley



17. Western Alliance Bancorp

Ticker: WAL

Industry Group: Banks

Absolute Correlation with 5Y5Y: 47%

Source: Morgan Stanley



16. United Rentals

Ticker: URI

Industry Group: Capital Goods

Absolute Correlation with 5Y5Y: 47%

Source: Morgan Stanley



15. Boeing

Ticker: BA

Industry Group: Capital Goods

Absolute Correlation with 5Y5Y: 48%

Source: Morgan Stanley



14. Popular, Inc.

Ticker: BPOP

Industry Group: Banks

Absolute Correlation with 5Y5Y: 48%

Source: Morgan Stanley



13. Wesco International

Ticker: WCC

Industry Group: Capital Goods 

Absolute Correlation with 5Y5Y: 48%

Source: Morgan Stanley



12. Primerica

Ticker: PRI

Industry Group: Insurance

Absolute Correlation with 5Y5Y: 48%

Source: Morgan Stanley



11. Apple Hospitality REIT

Ticker: APLE

Industry Group: Real Estate

Absolute Correlation with 5Y5Y: 48%

Source: Morgan Stanley



10. Sterling Bancorp

Ticker: STL

Industry Group: Banks

Absolute Correlation with 5Y5Y: 48%

Source: Morgan Stanley



9. Allison Transmission Holdings

Ticker: ALSN

Industry Group: Capital Goods

Absolute Correlation with 5Y5Y: 49%

Source: Morgan Stanley



8. Royal Caribbean Cruises

Ticker: RCL

Industry Group: Consumer Services

Absolute Correlation with 5Y5Y: 49%

Source: Morgan Stanley



7. American International Group

Ticker: AIG

Industry Group: Insurance

Absolute Correlation with 5Y5Y: 49%

Source: Morgan Stanley



6. Regions Financial Corporation

Ticker: RF

Industry Group: Banks

Absolute Correlation with 5Y5Y: 49%

Source: Morgan Stanley



5. MetLife

Ticker: MET

Industry Group: Insurance

Absolute Correlation with 5Y5Y: 49%

Source: Morgan Stanley



4. Fifth Third Bancorp

Ticker: FITB

Industry Group: Banks

Absolute Correlation with 5Y5Y: 52%

Source: Morgan Stanley



3. Unum Group

Ticker: UNM

Industry Group: Insurance

Absolute Correlation with 5Y5Y: 52%

Source: Morgan Stanley



2. Prudential Financial

Ticker: PRU

Industry Group: Insurance

Absolute Correlation with 5Y5Y: 52%

Source: Morgan Stanley



1. Lincoln National Corporation

Ticker: LNC

Industry Group: Insurance

Absolute Correlation with 5Y5Y: 54%

Source: Morgan Stanley





* This article was originally published here Press Release Distribution

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