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Morgan Stanley Says Telecom Stocks One of Europe’s Few Safe Bets

For European investors seeking stability but finding nothing but high-priced equities, phone stocks beckon.

That’s the view of Andrew Sheets, Morgan Stanley’s chief cross-asset strategist, who says shares of telecommunications companies stand out among other defensive industries where valuations are dangerously high. The Stoxx 600 Telecommunications Index trades at 16.3 times estimated earnings, compared with more than 18 for consumer shares.

Sheets recommends sticking to cheap, safe bets as volatility returns to the market following a summer lull. Risks facing European investors include an Italian referendum with the prime minister’s job at stake, French and German elections next year, and growing concern that the European Central Bank won’t add to its stimulus program, he said. Morgan Stanley estimates the MSCI Europe Local Index will fall about 8 percent in the next year.

“It’s still tough for the European equity market overall,” Sheets said in a telephone interview. “Given that many European defensives are already very rich, telecoms look especially attractive.”

The Stoxx 600 Telecommunications Index has slumped 17 percent this year, more than double the broader measure, amid worsening profit growth and high competition. Still, members of the gauge, such as Britain’s Vodafone Group Plc and Spain’s Telefonica SA, offer a dividend yield of 5.1 percent on average, higher than the payout of utilities, drugmakers and consumer companies.

After cyclical firms globally posted their best two-month showing since 2012 relative to defensive stocks, uncertainty about Federal Reserve rate policy and the recovery triggered a selloff in September. Economic data for the euro area, which beat forecasts over the summer, are now missing them by the most since April, and the ECB lowered its growth projections for 2017 and 2018 last week. While the Stoxx 600 is down this year, equity gauges for the U.S. and Asia have risen.

“We think Europe has worse risk-reward than other global equity markets,” he said. “We forecast the market to be lower in 12 months.”

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