Morgan Stanley just revealed its best long-term stock picks in Europe

Published Mon, Apr 3 20231:24 AM EDT

Despite their underperformance in recent years, " quality" stocks have been persistent outperformers within European stock markets for decades, according to research from Morgan Stanley . The bank has revealed its "35 for 2025" list, featuring the bank's 35 best long-term picks in Europe. "The last three years of underperformance is both a rare anomaly and a potential opportunity for investors to re-engage. Notwithstanding recent price moves, quality stocks also look reasonably valued, with average relative valuations for the MSCI Europe Quality index below their 10-year average," Morgan Stanley's analysts, led by Giorgio Magagnotti, wrote in a note on Mar. 29. The bank's list comprises the highest-quality companies in each sector that the bank thinks are set to strengthen their competitive advantage, and differentiate their business models and market positions into 2025. Stocks that made the cut What follows is a selection of stocks that made an appearance on Morgan Stanley's "35 for 2025" list: French cosmetics firm L'Oreal tops the ranking. L'Oreal has the "best-in-class" execution in consumer staples across Europe, according to the bank. It said L'Oreal is "well positioned" to continue its outperformance relative to peers, with an expected compounded 8% growth in earnings per share into 2026. British alcoholic beverage maker Diageo also makes an appearance, with Morgan Stanley confident of Diageo's ability to deliver "superior" growth. The bank views Diageo as a "core holding quality stock for the long-term." Within the semiconductor space, ASML is Morgan Stanley's top pick. The Dutch semiconductor equipment maker is positioned at the "pinnacle" of the chip sector, the bank said, and plays a "significant role" in driving the trend towards digitalization. Morgan Stanley is also a fan of Nestle , saying the Swiss food and beverage giant enjoys "strong market dominance", which coupled with its "superior" execution track record and pricing power, is expected to support around 5.5% organic sales growth and 8% EPS growth into 2026. Meanwhile, French energy firm TotalEnergies is seen as one of the most defensive plays in Morgan Stanley's coverage, given its "more stable" earnings relative to peers in Europe. The firm's upstream portfolio also supports shareholder remuneration and its green energy growth opportunities, the bank added. What sets them apart "Interestingly, this list of stocks has performed better in recent years than the MSCI Quality and Growth indices and offers a more attractive risk-reward skew going forward," the bank said. It expects the companies to see stronger revenue growth, profit growth and operating profit margins than the broader market into 2025. The bank said it has turned more cautious on the outlook for European stocks and is recommending investors increase their exposure to stocks with more defensive, quality and growth characteristics. "We think investors may prefer instead to rotate back towards more quality and growth stocks after an unusually large period of underperformance and with the outlook for bond yields and interest rates now potentially turning lower again," Morgan Stanley added. — CNBC's Michael Bloom contributed to reporting