Morgan Stanley's chief U.S. equity strategist is balancing his portfolio with dividend-yielding defensive stocks, because the firm expects just one interest rate increase in December.
"I think you have to be balanced across the stock market. You have to own some defensives — even though they look expensive — because if rates don't back up, you're going to be hurt there," Adam Parker told CNBC's "Squawk on the Street" on Thursday.
Parker spoke one day after the Federal Open Market Committee left rates unchanged and more members of the policymaking group indicated they anticipate just one hike this year rather than two.
Among defensive sectors, the firm is overweight utilities and consumer discretionary and underweight consumer staples. In Morgan Stanley's view, investors will pay less for return-on-equity variability, earnings growth variability and dispersion of estimates for utilities than for staples.
Defensive stocks act as bond market proxies by yielding dividends during times of low interest rates. But Morgan Stanley is also overweighting financial stocks, which typically suffer in low-rate environments because they earn less from lending activity.
Parker said he likes the low correlation between utilities and financials, because it mitigates risk.
"If you just want to make a bet rates are backing up, then you own nothing defensive at all, you own a ton of financials and you just pray," he said.
"If I say I don't own any defensives because they're expensive, I'm underweight beverages, household products, tobacco, food, utilities, telcos. If rates don't back up, I'm going to underperform," he said.