Rates are up! Expert names 2 ASX shares for a global downturn

Interest rates are headed upwards and economic activity could wind down. In that environment, Morgan Stanley likes this pair of stocks.

For the first time in 11 years, the Reserve Bank of Australia has raised the cash rate.

On Tuesday, the RBA governor Philip Lowe confirmed the official rate would increase from its historic low of 0.1% to 0.35% in a bid to slow down spending and put a brake on inflation.

So with real-life interest rates now heading upwards here and around the world, economic activity could slow down in the coming months.

Morgan Stanley head of wealth management research Alexandre Ventelon said investors need to be careful in the short term.

"Although the prospect of a recession is relatively low for the next 12 months, we believe the risks are rising on a 24+ month horizon," he posted on Livewire.

For a global firm like Morgan Stanley, the ASX continues to be its "preferred equity market" as it has a better growth outlook than other regions.

The dominance of mining and financials and a Reserve Bank that's less hawkish than other central banks are also factors.

Ventelon's team recently released a memo to clients singling out two ASX shares they believe will thrive while the world deals with an economic downturn:

A man sits in contemplation on his sofa looking at his phone as though he has just heard some serious or interesting news.

Image source: Getty Images

The telco that delivered on its promise

Ventelon noted that, after five years of falling earnings, Telstra Corporation Ltd (ASX: TLS) has now reversed that trend.

"The first half results delivered on the promise of a return to organic [earnings before interest, tax, depreciation and amortisation] EBITDA and [earnings per share] EPS growth," he said.

"The company's organic EBITDA grew +5.1% in 1HFY22 compared to the prior corresponding period."

The drivers for this improvement were the conclusion of the NBN rollout, "significant" cost and workforce shrinkage, and a return to positive average revenue per user (ARPU) in the mobile business.

"Morgan Stanley's base case assumption is for an ARPU increase of 2% per annum for the next three years to $52 per mobile in FY24E, although it may not reach its previous high watermark until the end of FY31."

All this points to a bright future in a world which can't really do without mobile and internet services, regardless of how the economy is going.

"Altogether, the return to positive EBITDA growth, mobile topline strength and higher margins boost confidence in the sustainability of Telstra's dividend, which represents a yield of 4% with the potential to rise over time."

Telstra shares have lost 5.5% of value this year but, over the past 12 months, the company's share price has still gained a handsome 14.3%.

An even more secure bet in turbulent times

Similarly, the Morgan Stanley team likes the shares for Telstra's counterpart over the Tasman Sea Spark New Zealand Ltd (ASX: SPK).

"The stock trades ~1x EV/EBITDA multiple point higher than Telstra, but offers a very secure dividend and higher yield than its counterpart."

First-half results showed a "stronger than expected" 5% mobile ARPU growth and positive earnings growth.

The dividends are now world-class.

"The yield is the highest in Morgan Stanley's Australia/NZ telecommunication coverage universe and equal to some of the major banks."

Spark's earnings outlook is "more secure" than Telstra, making for an even lower risk profile during an economic slowdown.

"In addition, there could potentially be dividend upside if the company is able to sell a portion of the mobile towers for an attractive price."

The Spark share price is up more than 3.9% so far this year. It has gained in excess of 8% over the past 12 months.

Motley Fool contributor Tony Yoo has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has positions in and has recommended Telstra Corporation Limited. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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