Markets: Sector pecking order

Seven Morgan Stanley analysts have spoken to 51 fund managers and found out they dislike building materials and airline stocks, like engineering and construction shares even less and are bullish on healthcare equities, such as CSL and ResMed.

Building materials shares are “out of favour", says the team of Morgan Stanley analysts led by Scott Kelly.

Among such stocks, shares in building products manufacturer James Hardie Industries would have to fall another 10 per cent for it to become attractive to fund managers. At 1503 AEST James Hardie shares were unchanged at $9.20.

If building materials manufacturer Boral shares fell another 10-20 per cent, the stock may see some buying interest from the fund managers, says Morgan Stanley. Boral shares were down 2.5 cents, or 0.6 per cent, to $4.265 at 1503 AEST.

“Engineering and construction stocks were the least preferred by investors amongst our industrial coverage,” says the broker. The share prices in the sector need to fall by as much as 50 per cent for the stock to be “attractive”, Morgan Stanley says.

“WorleyParsons is clearly the most preferred stock, with Downer EDI expected to deliver the best share price performance after its result,” says the analysts. “UGL was seen as the stock most likely to underperform post result.”

Investors like healthcare stocks.

"CSL and ResMed are the top picks in the space, and investors see most upside earnings risk for these two stocks," says Morgan Stanley."ResMed is seen as most likely to outperform post-result. Cochlear is seen as the most likely to underperform."

The analysts say infrastructure stocks are of little interest to investors. "The key risk for the sector remains bond yields," says Morgan Stanley.

Among transport stock investors like rail and port operator Asciano and pallet and plastic container manufacturer Brambles, according to the analysts. They don’t like airline stocks as expectations for their earnings may be too high. Port and rail volumes are not expected to recover in the next 12 months.