Morgan Stanley's quant team unveil the top 13 shares for what they say is an ideal risk environment for stockpickers

  • Correlations between stocks are falling rapidly and stock-specific risk is gaining – Morgan Stanley.
  • This environment is supportive for stockpickers, as they can concentrate on fundamentals.
  • Some sectors are provide better opportunity than others. These are Morgan Stanley’s top 13 picks.
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It’s a good time to be a stock picker. And not just due to the current bull market, but because the risk environment right now is an easier in which active investors can find the best shares to own, according to Morgan Stanley.

This is because the relationship between stocks, known as the pairwise correlation, has weakened signficantly over the last few years. In simple terms, this means stocks are less likely to trade in unison with one another than they have done in the past, meaning that the performance of one stock is less likely to be affected by that of another stock.

This means the idiosyncratic characteristics of each stock can prevail, according to Alix Guerrini, a quantitative strategist at Morgan Stanley.

Additionally, the influence of systemic risk has also reduced, while stock-specific risk, “the bread and butter of stockpicking,” has been rising since the middle of March last year, Guerrini said in a recent research note. These two elements have created a very supportive environment for stockpickers looking for their next investment.

 

To see the effect of this risk environment on stockpicking, Morgan Stanley extract monthly residuals for each index, net of market effect, to show a 6-factor model that includes value, growth, size, low volatility, quality and momentum, he wrote.

“The resulting alpha of fundamental managers is higher (double) when the pairwise correlation is falling, or the stock-specific risk is rising, but slightly lower for quant funds in these periods,” he added.

However, this environment is not prevalent across the whole market, as only some sectors have such historically low pairwise correlations, he noted.

For example, technology, retail, real estate, media and telecoms have pairwise correlations under 0.3, which is lower than their 30th percentile since 1990, and are prime targets for stockpicking, compared with the energy, autos and banking sectors.

Morgan Stanley lists the 13 stocks in its coverage that it believes are best placed to capitalize on such a supportive risk regime for stockpickers and for which it has either an equal-weight, or overweight, rating: 

SES

  • Ticker: EPA: SESG
  • Sector: Media and Entertainment
  • Market cap: €3.21 bln
  • Equalweight

Sage Group

  • Ticker: LON: SGE
  • Sector: Software and Services
  • Market cap: £6.62 bln
  • Equalweight

Atlantia

  • Ticker: BIT: ATL
  • Sector: Transportation
  • Market cap: €13.07 bln
  • Equalweight

Pearson

  • Ticker: LON: PSON
  • Sector: Media and Entertainment
  • Market cap: £5.78 bln
  • Equalweight

Capgemini

  • Ticker: EPA: CAP
  • Sector: Software and Services
  • Market cap: £23.26 bln
  • Overweight

Atos

  • Ticker: EPA: ATO
  • Sector: Software and Services
  • Market cap: €7.41 bln
  • Equalweight

Worldline

  • Ticker: EPA: WLN
  • Sector: Software and Services
  • Market cap: €22.14 bln
  • Equalweight

Ericsson

  • Ticker: STO: ERIC-B
  • Sector: Technology
  • Market cap: $45.35 bln
  • Overweight

Vivendi

  • Ticker: EPA: VIV
  • Sector: Media and Entertainment
  • Market cap: €36.40 bln
  • Overweight

Ayden NV

  • Ticker: AMS: ADYEN
  • Sector: Software and Services
  • Market cap: €65.92 bln
  • Overweight

Gecina

  • Ticker: EPA: GFC
  • Sector: Real Estate
  • Market cap: €9.00 bln
  • Equalweight

Ubisoft Entertainment

  • Ticker: EPA: UBI
  • Sector: Media and Entertainment
  • Market cap: €9.32 bln
  • Overweight

Getlink

  • Ticker: EPA: GET
  • Sector: Transportation
  • Market cap: €7.32 bln
  • Equalweight

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