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Brandywine Global portfolio manager Patrick Kaser said his firm is positioning itself for a recession next year and eyeing defensive equities as a result. “We’re in the camp that a recession is much more likely than not,” Kaser told CNBC. “And so we’re really emphasizing … less economically sensitive sectors with attractive valuations.” The December CNBC Fed Survey showed respondents growing more optimistic about the probability of a “soft landing” in the U.S. economy in 2024. They also expect the central bank will begin cutting benchmark interest rates by the middle of next year. In a bid to tame inflation, the Federal Reserve has held its overnight borrowing rate at its highest level in more than 22 years. “We expect, based on history, some stress in the market over the next six months at some point, and we’ll be viewing that as an opportunity to redeploy out of these defensive areas,” he said. Kaser highlighted sectors that his firm remains overweight rated on including health care, consumer staples, utilities and telecommunications. Stocks have shown steady momentum as Wall Street nears the end of 2023, with all three major indexes riding an eight-week winning streak into the year’s final trading sessions. “Based on history, some stress in the market over the next six months, at some point, and, we’ll be viewing that as an opportunity to redeploy out of these defensive areas,” he said. However, Kaser expects 2024 to bring a market realignment to the forefront, which necessitates a defensive approach. Here’s a look at the portfolio manager’s top stock picks for 2024 to play an expected economic slowdown. In health care, Kaser highlighted CVS Health as a stock trading at a discount due to low expectations from investors, which makes it attractive. CVS YTD mountain CVS stock has fallen 15% from the start of the year. “[CVS is] still really trading at roughly nine times earnings [with] really low expectations, [and] people are skeptical of their ability to execute. So not only do you not have the economic sensitivity, but also it’s really kind of an execution within their control story,” he said. The company recently announced plans to redesign its prescription drug pricing model to change how its pharmacies are reimbursed beginning in 2025. Shares of CVS have fallen more than 15% since the start of 2023. Also on Brandywine’s list is supermarket chain Kroger , which Kaser says can benefit from the potential finalization of its merger with peer Albertsons . Although Kroger is the largest dedicated grocery chain in the U.S., its business combined with that of Albertsons’ would still rank behind the size of Walmart’s heft. Still, some U.S. lawmakers have objected to the merger, which comes at a time when consumers have seen huge food inflation at the checkout aisle. Kaser said Kroger can announce a large stock buyback if the Albertsons deal falls apart, and similarly boost its stock. Kroger shares have gained only 1.5% in 2023. KR YTD mountain Kroger stock has added nearly 2% from the start of the year. “So [there’s] not a lot being priced into the valuation,” Kaser said. “People seem to have more fear, but there’s really a win-win outcome in terms of the stock.” Aerospace company AerCap also ranks among Kaser’s picks as it’s expected to benefit from tight aircraft demand and higher lease rates. AerCap CEO Aengus Kelly recently echoed a similar outlook for the industry on CNBC earlier this month. AER YTD mountain AerCap stock has rise nearly 28% from the start of 2023. “AerCap is a really cheap stock with favorable industry dynamics for probably several years to come,” Kaser added. AerCap shares have seen bigger gains heading into the year-end, with a 27% increase in its stock year to date. On the spectrum of companies that have more exposure to macroeconomic conditions, Kaser pointed to General Motors as a stock that has already priced in the expectation of a recession and can benefit from the resolution of the United Auto Workers strike and a strong forecast for next year. “[GM] has a really positive backdrop,” he said. “I think people are skeptical about autos heading into an economic slowdown, but we think [GM] is already pricing that in.” UBS is also bullish on GM and named the legacy automaker stock a top idea for 2024. GM shares are up less than 8% year to date. GM YTD mountain General Motors stock has gained 8% in 2023. Kaser also lauded payment processing company Global Payments given its low valuation compared with its peers. He expects the company could emerge as more of a defensive play next year. GPN YTD mountain Global Payments stock has risen 27% year to date. Global Payments stock hit a 52-week high earlier this month and is up 27% for the year. “We think Global Payments [has] much more of a moat around its business than people seem to be fearing,” Kaser said.
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