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Morgan Stanley analysts are bullish on US bank stocks and other financial stocks

Rising interest rates, expense management and deregulation should help bank stocks, according to the analysts

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Asset managers focused on growth and cutting costs should also outperform

Morgan Stanley analysts are overweight in US financial stocks and banking stocks in particular as interest rate hikes loom and regulatory tailwinds look favorable.

The consensus at the Wall Street bank is that US equities will move in a narrower range and volatility will remain high throughout the rest of the year, according to a new US Equity strategy report.

“We still expect to see further upside for the market before the cycle ends, but this will be on less breadth and will come with higher risk,” the analysts said.

“In this environment, we think stock picking will become more important,” they added.

The analysts remain bullish on financial stocks as their “relative earnings revisions appear to be stabilizing after a decline in the first half of the year”. 

Rising interest rates, expense management and deregulation are all positive factors for bank stocks. Insurers, meanwhile, face more cyclical and structural pressures,  but “select opportunities” exist.  Those asset managers which are focused on growth, cutting costs and developing their platforms and infrastructure should outperform, but Morgan Stanley’s team prefers alternative asset managers and brokers to the traditional ones.

On Morgan Stanley’s list of stock picks are the insurer American International Group (NYSE:AIG) (Price target: US$65) for its clean balance sheet, strong management and focus on underwriting profitability as well as the private equity house Apollo Global Management (NYSE:APO) (PT: US$41) as Morgan Stanley argues that the market is undervaluing Apollo’s growth in “sticky management fee earnings”.

Additional picks by the House of Morgan include JPMorgan Chase & Co (NYSE:JPM) (PT:$135), Visa (NYSE:V)  (PT:$142), Athene (NYSE:ATH) (PT: $62), Bank of the Ozarks (NASDAQ:OZRK) (PT: $62)  and Discovery Financial Services (NYSE:DFS) (PT: $90).

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