Morgan Stanley says inflation is heating up and these are the 12 undervalued stocks in a 'sweet spot' that you need to own thanks to their pricing power

  • As the global economy recovers, inflation is widely forecast to pick up in the near term. 
  • Morgan Stanley say that investors want to look for stocks with good pricing power and value offerings.
  • These are the 12 stocks the firm is recommending.
  • Visit Business Insider’s homepage for more stories.

In such a low interest-rate environment, investors can be forgiven for not having inflation concerns at the forefront of their minds. 

But, with broad economic growth set to rebound this year, oil’s recovery from historic lows and key indicators heralding the return of rising price pressures, Morgan Stanley argues investors need to be gearing their portfolios to a new inflationary environment.

Strong nominal growth will be broadly supportive of earnings, and so investors should look for companies with strong pricing power. This allows companies to translate rising price levels into increased profit margins, the firm said in a note published Monday, 

Moreover, a reflationary period tends to favor value companies over growth firms – that is, those stocks that are lagging the performance of the broader market and have room to rally. Right now, those candidates in that bracket that have “positive pricing power dynamics with attractive valuations should be in something of a sweet spot,” the firm noted.

The reflation argument has come under a little scrutiny in 2021, with the S&P defensive index outperforming the cyclical index 15% in the past three months, and bond yields have retreated from their recent highs.

But, Morgan Stanley argues that this is a delay, as opposed to an impairment, and markets appear to reflect a consensus that inflation is going to accelerate. One longer-term gauge of market-based inflation expectations has picked up sharply. The so-called “breakeven inflation rate” – or the difference between the US 10-yr Treasury yield and its inflation-linked equivalent – has risen to around 2.1%, from closer to 1.70% three months ago.

The global inflation surprise index is already at a 2-year high and the US equivalent is close to a 10-year peak. This indicator has historically moved closely in line with actual US consumer inflation, the note said.

It’s not just the US either. Eurozone inflation is weak, but consumer prices are rising quickly in some of the bloc’s biggest economies, including Germany, France and Spain, which points to a pickup across the bloc. The French 10-year breakeven inflation rate is now around 6.35 basis points, a fraction of that of its US peer, but up from closer to 3.77 basis points just three months ago, according to French government data.

When inflation picks up, it becomes important to invest in stocks that have pricing power, Morgan Stanley said.

At the moment, this may not appear a challenge, as strong nominal growth is good for aggregate corporate profits, but in an inflationary environment, the divide between companies with, and without, pricing power widens, the note added.

This means that some companies will not be able to pass on increasing input costs to customers, ultimately limiting their ability to improve their profitability margins.

These are the 12 stocks in Europe that Morgan Stanley says have the double-whammy of having room to rally but also the room to raise prices as economic growth improves:


  • Ticker: LON: VOD
  • Market cap: $47.1 bln
  • Sector: Communications


  • Ticker: ETR: IFX
  • Market cap: $53.2 bln
  • Sector: Semiconductors


  • Ticker: EPA: STM
  • Market cap: $36.5 bln
  • Semiconductors/electronics


  • Ticker: AMS: MT
  • Market cap: $24.1 bln
  • Sector: Materials


  • Ticker: AMS: APAM
  • Market cap: $3.7 bln
  • Sector: Materials


  • Ticker: LON: DRX
  • Market cap: $2.03 bln
  • Sector: Utilities


  • Ticker: LON: ITV
  • Market cap: $5.9 bln
  • Sector: Media and Entertainment


  • Ticker: EPA: ML
  • Market cap: $24.0 bln
  • Sector: Autos and components


  • Ticker: ETR: DAI
  • Market cap: $74.7 bln
  • Sector: Autos and components

Standard Life Aberdeen

  • Ticker: LON: SLA
  • Market cap: $9.6 bln
  • Sector: Diversified Financials


  • Ticker: LON: MGGT
  • Market cap: $4.3 bln
  • Sector: Capital Goods

Zurich Insurance

  • Ticker: SWX: ZURN
  • Market cap: $62.3 bln
  • Sector: Insurance

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