Morgan Stanley made adjustments to its sector recommendations in Europe, downgrading the energy and automotive sectors while upgrading real estate and diversified financials to overweight in a note Thursday.
According to Morgan Stanley, the energy sector has been downgraded from equal-weight to underweight due to expected peak crude oil market tightness, the resumption of OPEC and non-OPEC production growth after the third quarter, and what the firm describes as "fully valued" TTF and LNG prices.
The energy sector's position in Morgan Stanley's model has dropped significantly, reflecting its positive bond yield correlation, weak earnings trends, and low pricing power, as noted by analysts at the firm.
The automotive sector has also been downgraded to underweight.
"Autos was already a borderline Underweight at our last model update (19th place of 28 sectors) but has dropped further to 26th place," analysts wrote.
Since then, the sector's ranking has fallen even further to 26th place. This downgrade aligns with the cautious view of the firm's sector analysts.
In contrast, Morgan Stanley upgraded the diversified financials (DivFins) and real estate sectors to overweight from equal-weight.
The firm's new model components favor bond yield-sensitive stocks, which benefit both sectors. For DivFins, the upgrade is supported by improving management sentiment, continued strong idiosyncratic momentum, and a deceleration in employee changes.
Real estate, on the other hand, is said to benefit from strong idiosyncratic momentum, high exposure to mergers and acquisitions, and is no longer penalized for high leverage under the new model.