The sustainable and ESG investing revolution is set to continue in 2021, with investors looking for the next wave of opportunities, Morgan Stanley strategists said, as they revealed the 15 stocks to buy.
The investment bankâ€™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 â€œonly likely to increase.â€ Morgan Stanleyâ€™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 â€œmore of the sameâ€ in 2021.
Morgan Stanley outlined the stocks exposed to the European Green Deal â€”a set of policies aiming to make Europe climate neutral by 2050â€”and those exposed to potential climate-policy reform under a Biden administration as well as to Chinaâ€™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 â€˜green pure playsâ€™, such as electric-vehicle makers Tesla and Nio and hydrogen-fuel-cell company Plug Power among the strongest.
â€œWe expect the green theme to continue in 2021, but see a risk of the â€˜pure playsâ€™ having a pause after strong performance this year with investors looking for the next wave of opportunities,â€ they said.
Urging investors to be selective on themes, seven of Morgan Stanleyâ€™s 15 stocks offer a way to play the global decarbonization trend. In Europe they chose energy-technology company Siemens Energy for its exposure to renewables and gas, as well as German chip maker Infineon, given its â€œcommanding position in power semiconductorsâ€ used in electric vehicles. Germanyâ€™s Covestro 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 AES, citing its transformation in developing renewables and storage, and automobile-parts company Aptiv for its growing focus on electric vehicles. In Asia they selected electric-vehicle-battery manufacturer LG Chem 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 CJ Cheiljedang, and Chinaâ€™s Bluestar Adisseo for its products providing nutritional solutions for animal feed. Aluminium-beverage-can producer Ball Corp and Thailandâ€™s SCG Packaging 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 ESGâ€”asset manager Amundi, testing and inspection specialists Bureau Veritas, and U.S. data analytics company Verisk for its climate-data offering.