Morgan Stanley upgrades European defensive stocks to 'overweight'

LONDON (Reuters) - Morgan Stanley upgraded European defensive stocks to "overweight" on Monday, raising its stance on consumer staples <.SXQP> stocks while downgrading the industrials <.SXNP> and basic materials <.SXPP> sectors.

The Wall Street bank kept its "overweight" ratings on the defensive pharmaceuticals <.SX4P> and tobacco sectors. It cut industrials to "neutral" and materials to "underweight."

Morgan Stanley's strategists say median valuations for European equities at levels consistent with poor subsequent returns while the bounce in cyclical sectors, particularly industrials, appears extended and not backed up by earnings.

"Although we have been cautious on European equities for the last six months, we have not been positive on 'Defensives' as we found them both overbought and expensive," Morgan Stanley wrote in a research note.

Recent underperformance has made them attractive again especially in "the face of a tricky market environment this year," Morgan Stanley added.

(Reporting by Sudip Kar-Gupta; Editing by Vikram Subhedar)

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