Stock picks for a rebound in transport and infrastructure: Morgan Stanley

• With economic recovery on the cards in 2021, Morgan Stanley argues transport and infrastructure stocks will be the major beneficiaries of the rotation into value, according to research note.
• But not all stocks are winners, Morgan Stanley notes.
• These are the 9 they think you should own.
• Visit Business Insider’s homepage for more stories.

With economic recovery widely forecast for 2021, transport and infrastructure stocks have been a key beneficiary of the rotation to value to continue into 2021, according to a Morgan Stanley research note published Thursday.

Transport stocks were hard hit this year, falling around 13% so far this year, but they have gain “18% (11pp above broader market) since positive vaccine newsflow came to the market on 9 November,” the note said.

The positive news caused a rally in the markets as investors saw the vaccine as a route out of national lockdowns and recession, moving into a possible broad economic recovery. This broad optimism favored many of the most beaten-down value stocks, whose businesses are highly dependent on the strength of the underlying economy.

In the case of airlines, the news that air travel might return to more historically normal levels has been a huge boost, the note said, adding that Morgan Stanley is “positive on air recovery, but not more than the market.”

The speed and shape of air passenger recovery is the key theme for airlines and airports. “We think the rebound will be strong once travel restrictions are lifted, but 2019 volumes are unlikely to be achieved this summer, so we keep our preference for Ryanair, as a structural winner, with less downside in case the recovery takes longer to materialise,” the note added.

However, not all stocks offer the same opportunity, and indeed, some should be avoided altogether. Flagship domestic airlines are less attractive than their lower-cost rivals such as Ryanair, or easyJet, for example. 

“We would avoid Air France-KLM and Lufthansa on restructuring risks and valuation and ADP on regulatory risks, rising capex and disappointment on retail,” the note highlighted, noting that “airlines stocks could go in a high yield environment, and would pick easyJet as offering the best risk reward in this scenario (though AF and LHA would benefit significantly also). We would be most cautious on legacy carriers in the case environmental concerns for travel return, as it is likely to weaken business travel further.”

While commercial air travel might struggle next year, Morgan Stanley expect seaborne freight volumes and rates to continue to pick up in 2021, with Danish freight groups Maersk and DSV Panalpina providing an attractive opportunity to tap into that, the note said.

“We think better fundamentals in shipping will likely continue in 2021, driving our overweight on Maersk. We expect air-freight yields to normalize, but slower than consensus expects, and increased e-commerce spend to be resilient into 2021, which coupled with good M&A prospects drive our overweight on DSV,” the note added.

In addition, reflation and M&A are a focus for the infrastructure sector, Morgan Stanley said. The bank’s assumption is that of “the global V- shaped growth recovery and ensuing reflation, particularly in the US,” the note said. 

Spain’s Ferrovial in particular should “play on the expected strength of the US economy recovery and reflation trade as well as the strength of US managed lanes as the new #1 valuation anchor,” it added. Ferrovial’s subsidiaries operate all over Europe, Latin America and the United States. The company owns major airports such as London’s Heathrow and, across the United States, runs and maintains nearly 100 miles of major highways and expressways.

These are the nine stocks that Morgan Stanley think are ideally placed for the cyclical recovery within transport and infrastructure.