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Investors should buy these ‘deflation enablers’ to counter an inflationary era, Morgan Stanley says

Surging prices, while a headache for every company, could force an acceleration of investment in technology that enhances productivity, and some innovative firms stand to benefit the most, Morgan Stanley found. The Wall Street firm believes that persistent inflation in areas such as labor and energy would give rise to transformational investment across industries. The bank said many of these technologies, such as automation and clean energy, are inherently deflationary. “In an inflationary world, we believe companies that have developed deflationary products/services will become increasingly valuable,” Joshua Pokrzywinski, Morgan Stanley’s equity analyst, said in a note. “Cost pressures should make companies accelerate investments in automation and productivity-enhancing technologies.” Deflationary forces Popular investor Cathie Wood also subscribes to this school of thought about deflationary forces taking hold. She’s been going against the grain on inflation for a while, calling for deflation with innovation trends taking off. Recently, the innovation-focused investor highlighted a number of leading indicators that point to deflationary forces instead of inflationary, such as a rising dollar, declining oil prices and muted action in gold. Ark Invest’s Wood believes inflation should ease quickly in the next few months as inventory issues resolve. For investors wanting to bet on this deflationary trend, Morgan Stanley came up with a shopping list of “deflation enablers” across various sectors and industries. Opportunities in multiple industries The Wall Street firm believes the auto industry will continue to see technological changes driving structural deflation in terms of total cost of ownership and the incremental mile travelled. Companies like Tesla , XPO , ArcBest are among the best positioned for this shift in auto and mobility industry, Morgan Stanley said. Meanwhile, the bank believes deflation in clean energy continues to be underestimated, and investors should look at key players like AES , Plug Power and Sunrun . “The Energy Transition will be a long and delicate balance — and ultimately likely to be highly inflationary,” the bank said. “This should lead to greater investment in deflation-enablers in the energy segment, on which the global economy continues to wholly depend.” There is also a slew of software names that could benefit from this deflationary trend as more companies upgrade their infrastructure to lower costs and improve productivity. Some of these software names include Salesforce , ServiceNow , UI Path , Autodesk and Microsoft. — CNBC’s Michael Bloom contributed to this report.

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