Despite Current European Banking Uncertainties, Morgan Stanley Names Best Stocks To Sell Into Rallies

The European banking industry is "not as attractive as it was," according to Morgan Stanley, in light of recent market turbulence and precipitous share price drops.

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Following Credit Suisse's compelled takeover by rival UBS, concerns about the soundness of European banks continued to exist on Friday, which caused shares of Deutsche Bank to decline. The shares of the German lender now have lost over a fifth of its value this month after declining for a third straight day.

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Although the banking industry is currently more affordable, Morgan Stanley strategists issued a warning that news flow on earnings improvements and cash return forecasts may wane or change. Additionally, they propose that investors should lessen their exposure to the industry because the cyclical opportunity for European banks has closed.

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The strategists at Morgan Stanley, under the direction of Graham Secker, stated that while they are unsure of how things will turn out for financials moving forward, they are self - assured that the economic prospects has gotten worse and that the window for continued positive/improving macro data is starting to close.

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The team continued, telling clients that "banks will be volatile in both directions - we would sell into rallies," adding, "We are unwilling to demote the sector here just as we see scope for fluctuation to emerge just on upside in addition to the downside... however, we see even more ambiguity ahead and it would take a glance to minimize exposure in with any material rally."

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The paper emphasizes how every cycle of rate hikes over the past 70 years has resulted in a financial crisis or a recession, and the current unrest is no exception.

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Notwithstanding the fact that financial crises do not usually result in recessions, the strategists believe that the likelihood is low given current circumstances, including restricted credit supply and a sharply inverted yield curve.

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On the day of the Silicon Valley Bank crisis, the difference between the 2-year and 10-year yields was 110 basis points; now, it is only 34 basis points. This steepening following the failure of SVB Financial, Silvergate, and Signature Bank in the United States, as well as the forcible acquisition of Credit Suisse, according to Morgan Stanley, portends an oncoming downturn.

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To manage this climate with a defensive exposure, Morgan Stanley suggested the following overweight-rated (a buy comparable rating) equities.

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Stock Recommendations From Morgan Stanley To Navigate This Environment

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• SWISSCOM

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• ROYAL 

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• NOVO NORDISK B

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• KONINKLIJKE AHOLD DELHAIZE

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• SSE

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• CIE FINANCIERE RICHEMONT

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• PERNOD RICARD

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• NATIONAL GRID

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• BIOMERIEUX BIM-FR

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• ASML HOLDING

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Morgan Stanley is advising investors to buy shares of companies in typically safe industries like healthcare and utilities. These include, among others, Swisscom, KPN, Novo Nordisk, Ahold, and SSE.

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Moreover, Citi bank downgraded its European banking industry. The Wall Street bank's strategists advised investors to concentrate on technology even as market confronts more tail risks as a result of worries over the credit that flows at the major lenders.

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The argument that European markets have outperformed their American counterparts has also been impacted by the financial worries.

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In the past, it was anticipated that European stocks would do better because of a possible slowdown in the U.S. economy or a sell-off in the S&P 500 caused by the Fed.

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Morgan Stanley asserted that this perspective has changed as a result of the banking industry's issues, as European banks' success has been directly correlated with that of the larger European market.