The sustainable and ESG investing revolution is set to continue in 2021, with investors looking for the next wave of opportunities,
strategists said, as they revealed the 15 stocks to buy.
The investment bank’s strategists, led by Jessica Alsford, said the pace of ESG-related outperformance could slow in 2021, given the correlation to Quality stocks, which they expect to underperform Value. However, they noted that long term structural trends benefiting ESG names and indexes were “only likely to increase.” Morgan Stanley’s global strategy team preferred cyclical names instead, which account for 10 of their top 15 stock picks.
ESG stands for environmental, social and corporate governance, the three factors measuring the sustainability and societal impact of an investment in a company.
Flows into ESG funds are up 102% year-to-date, with November flows reaching $47 billion compared with an average of $13 billion in 2019, the strategists said, expecting “more of the same” in 2021.
Morgan Stanley outlined the stocks exposed to the European Green Deal —a set of policies aiming to make Europe climate neutral by 2050—and those exposed to potential climate-policy reform under a Biden administration as well as to China’s net zero ambitions. During 2020, these stocks have outperformed by 20% in Europe, by 46% in the U.S. and by 77% in Asia. The range of performance was wide, with so-called ‘green pure plays’, such as electric-vehicle makers
and hydrogen-fuel-cell company
among the strongest.
“We expect the green theme to continue in 2021, but see a risk of the ‘pure plays’ having a pause after strong performance this year with investors looking for the next wave of opportunities,” they said.
Urging investors to be selective on themes, seven of Morgan Stanley’s 15 stocks offer a way to play the global decarbonization trend. In Europe they chose energy-technology company
for its exposure to renewables and gas, as well as German chip maker
given its “commanding position in power semiconductors” used in electric vehicles. Germany’s
also featured as a leading producer of rigid foams used as insulation in buildings and increasingly in electric vehicles.
In the U.S., they liked global-energy company
citing its transformation in developing renewables and storage, and automobile-parts company
for its growing focus on electric vehicles. In Asia they selected electric-vehicle-battery manufacturer
and solar wafer producer
LONGi Green Energy Technology.
The strategists also picked five stocks relating to sustainable consumption, with governments turning their attention to food and agriculture. Their picks included agricultural equipment manufacturer Deere, South Korean food company
for its products providing nutritional solutions for animal feed. Aluminium-beverage-can producer
also made the list, offering alternatives to single-use plastics and packaging.
Finally, they highlighted three stocks as a way of playing the overall structural growth theme of sustainability and ESG—asset manager
testing and inspection specialists
and U.S. data analytics company
for its climate-data offering.