Analysts at Morgan Stanley have named their favorite stocks in Europe across investing themes that they say investors "cannot ignore." The investment bank gives 11 of their picks at least 40% upside. "We refresh our product that aims to identify the biggest themes across Europe that we believe investors cannot ignore. We then leverage our analysts' views to highlight the best stocks to play each theme," the analysts led by Ross A. MacDonald wrote in a research note dated Sept. 27. "We expect cyclicals to outperform given the prospect of rising bond yields and strong economic growth in 2022," the analysts wrote — cyclical stocks tend to fluctuate with overall economic performance. Under its "cyclical value" screen, Morgan Stanley picked building materials companies Holcim and HeidelbergCement and said both are likely to benefit from a "global resurgence" in construction. It gave Holcim a 63% potential upside to its base case price target and said HeidelbergCement has an upside potential of 47%. The timeframe for Morgan Stanley's base case price targets is 12 to 18 months. Green theme Looking at companies set to benefit from the "green recovery," Morgan Stanley noted the European Commission's focus on climate change, aiming for EU countries to be carbon neutral by 2050. Government spending is likely to mean private companies also put money into green measures, the analysts added. "As a result of this 'green' agenda, investor focus on stocks exposed to related themes is likely to remain structurally high through this decade," they wrote. Morgan Stanley likes rail company Alstom for its moves into green mobility, giving it potential revenue opportunities of around 25 billion euros ($29.2 billion), according to the bank. Another of its favorite plays for the so-called energy transition is Siemens Energy , which Morgan Stanley likes for its knowledge and scale in hydrogen . Meanwhile, the bank highlighted steel supplier SSAB 's forthcoming investments into climate change mitigation and said the company is set to return "significant" capital to shareholders. Alstom has a potential 86% upside to the bank's base case price target, while SSAB has 60% and Siemens Energy has 66%. Cost cutting Morgan Stanley also has what it calls a "self-help" theme, based around companies with a focus on cost-cutting or restructuring. With this mind, the analysts picked steel firm ArcelorMittal (with a 48% potential upside), liking the sale of its U.S. assets for more than $1 billion. They also chose utility company Engie , which it estimates has a 46% potential upside to its base case. "Engie is our preferred self-help/transformation story in Europe," the analysts stated. Mid-sized firms In its screen for mid-sized companies, Morgan Stanley picked pub chain Mitchells and Butlers , giving it a 43% potential upside, calling the sector "an attractive reopening play." It also likes software firm TeamViewer , due to its exposure to remote working and subscription service, and said the stock represents "growth at a reasonable price," with an upside potential of 76% Belgian mobile network Telenet Group Holding has a potential upside of 43%, according to Morgan Stanley, due to its "healthy income," "strong fundamentals," and "attractive price." The reopening trade As the reopening of Europe's economies ramps up following the coronavirus pandemic, Morgan Stanley picked Associated British Foods , owner of fashion retailer Primark, saying it is likely to benefit from "strong" demand as stores open their doors. It also likes the company's "very strong" balance sheet and estimated the stock has a 54% upside potential. "Investor interest in the 're-opening trade' waned over the summer due to the renewed increase in [Covid-19] cases and delta variant concerns more generally. However, going forward we'd expect investor focus on this theme to rebound," the analysts stated, adding that economically-damaging lockdowns are less likely given many governments are treating Covid-19 as endemic.
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Analysts at Morgan Stanley have named their favorite stocks in Europe across investing themes that they say investors "cannot ignore." The investment bank gives 11 of their picks at least 40% upside.