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Risk Management Getting Harder: Suggestions For How To Cope

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Risk management is perhaps the hardest it has been in years, and it appears to be getting even more difficult. The extreme volatility has made it nearly impossible for even the most experienced analysts, hedge fund managers and economists, so how is the average investor to cope? Morgan Stanley analyst Adam Parker, Ph.D. advised investors recently to do the opposite of what they think they should, but he continues to provide guidance on what he thinks they should do.

RIsk management – Segmenting stocks into three buckets

And he doesn’t seem inclined to think he should do the opposite of what he thinks he should do in order to effectively manage risk, although even Goldman Sachs has already retracted all six of its top trades for this year because the volatility has resulted in them being long—at least for now.

Parker said in a note dated March 11 that he has divided stocks into three “buckets”: Defensives, Growth and Unknown. He thinks investors should make some bets in all three of them “relative to their size in any individual bucket” in order to practice effective risk management. Here’s a quick summary of his recommendations by sector:

Utilities over Consumer Staples

In Defensives, he prefers Utilities over Consumer Staples, saying that his firm is overweight on the former but underweight on the latter. He added that their favorite Defensive stocks are Nextera Energy, NRG Energy and Pattern Energy Group.

The stocks Parker dislikes in the Defensives category include Kellogg, Sysco, Bunge, Edgewell Personal Care and Energizer Holdings.

Healthcare and Consumer Discretionary over Tech

In the Growth category, Parker prefers Healthcare and Consumer Discretionary over Technology. His favored stocks in this “bucket” are Amgen; Bristol-Myers; Biogen Mckesson; and St. Jude Medical. He dislikes Delphi Automotive; Interpublic Group; Harley-Davidson; H&R Block; Lear, Hyatt Hotels; Autonation; Panera Bread; and Penske Automotive.

If you think that list is long, Parker has an even longer list of Growth stocks he doesn’t like. Here’s the full list:

risk management

Financials over Energy

Parker puts Financials and Energy into his Unknown “bucket” because it’s nearly impossible to predict where they will go, making risk management here more difficult than for the other two of his buckets. He likes JPMorgan Chase; Goldman Sachs; Synchrony Financial; Discover; Ameriprise; Signature Bank; and Santander USA. He’s got quite a list of stocks he doesn’t like in the Energy category:

risk management

While favoring Energy stocks has been seen as a contrarian call, it’s one we’re starting to see firms make. As oil prices stabilize, the sector is beginning to look more favorable, and it may even still fall into the category of doing the opposite of what seems like a bad thing to do. Of course this is changing as more and more firms switch to favoring Energy stocks rather than spurning them.

It should be noted that Morgan Stanley has lived up to its reputation for making strong calls—through the end of last year. It would be interesting to see how the firm stacks up to the markets now when there is so much uncertainty that risk management becomes nearly impossible.

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