Morgan Stanley’s top-ranked ASX healthcare picks for right now

Despite the latest noises out of the White House promising some tariff respite, Trump’s ongoing trade war remains the big spectre looming over markets.

According to research from Morgan Stanley, one sector that could weather the storm is healthcare, especially if the worst were to happen and we entered a period of stagflation or even recession.

Here are its two big-name stock picks and the reasons it thinks the sector is well-positioned right now.

Tariff toughness

While pharmaceuticals are currently exempt from US tariffs, Trump hinted that an announcement on specific pharma tariffs could be expected “soon”.

Regardless, Morgan Stanley believes leading ASX health stocks should be able to offset any tariff impact through minimal price increases. 

It predicts the seven healthcare stocks in its sector coverage would need to increase prices between 0-7% to offset tariffs, depending on how specific exemptions played out in the coming weeks. 

Historical precedent

Using the GFC as an instructive case study, Morgan Stanley reviewed the performance of the healthcare industry against the ASX 200 during that time in case we entered a similar period of lower growth, higher inflation and more unemployment.

It found that between December 2007 and June 2009, healthcare stocks, as captured in the S&P/ASX 200 Health Care Index (XHJ), fell by 15%, compared to the 38% drop in the ASX 200, an outperformance of 23%.

All seven stocks in Morgan Stanley’s sector coverage also individually outperformed the ASX 200.

The 12-month EPS index of healthcare stocks also far outstripped that of the wider index during this period and actual earnings came out ahead of forecasts.

Five of the seven stocks also recorded positive EPS growth in both FY08 and FY09.

It wasn’t all good news, but on overall balance, the healthcare sector showed a level of resilience during a period of huge uncertainty.

As Morgan Stanley analyst David Bailey wrote, “while the Healthcare industry recorded more substantial multiple contraction, this was more than offset by positive EPS changes.”

The two picks

To find the strongest candidates in the field, Morgan Stanley considered the following quantitative factors:

• EPS growth
• EPS risk
• PE
• PE compared to 10-year averages

It then applied a qualitative assessment of tariff risks to rank the seven sector stocks in its coverage and found CSL Ltd (ASX: CSL) and ResMed (ASX: RMD) the clear winners as preferred industry exposures, despite both having outsized risk from tariffs. 

According to Morgan Stanley's analysis, CSL ranked first in terms of its current PE vs its 10-year average and EPS risk, despite the uncertainty around Trump's soon-to-be announced pharmaceutical tariffs.

ResMed ranked second for EPS CAGR, EPS risk and PE vs 10-year average, also putting it in a strong position, with both at relatively low PEs around the 20 mark.