By Sam Boughedda
Morgan Stanley analysts told investors in a note Thursday that telecommunications stocks may hold up well into year-end.
The analysts explains in a research memo that investors are increasingly concerned that we are entering a recession, and typically, telecommunications stocks would benefit from a defensive rotation in such an environment.
"We did see some buying interest earlier this year, but a second consecutive guidance cut from Verizon in 2Q along with AT&T's bearish commentary on customer payment trends and free cash flow put an end to that rally," the analysts wrote.
He added that since then, we have seen telecommunications stocks struggle, "moving broadly in line with movements in interest rates with the dividend yield/10-year treasury yield spread remaining fairly stable."
"We are cautiously optimistic that 3Q results could be more reassuring, potentially helping the stocks hold up well into year end. Many of the macro headwinds (apart from rates) highlighted by our strategist Mike Wilson are less relevant for Telco stocks: Europe weakness, dollar strength, higher rates, China reopening uncertainty, etc.," the analysts added.
Morgan Stanley's Top Pick in telecom services remains T-Mobile (NASDAQ:TMUS), with the analysts commenting that "the $14bn initial buyback program providing valuable support in these volatile markets."