12:07 PM EDT, 03/13/2024 (MT Newswires) -- The US auto industry will benefit from global changes in the sector that has a renewed focus on capital efficiency and returns after years of peak spending, Morgan Stanley said in a note Wednesday.

"The industry has attractive optionality to lower spending, increased collaboration and restructured portfolios," the firm said.

The auto demand trends over the past few months support the thesis of "higher for longer internal combustion engine," according to the note.

Legacy original equipment manufacturers are also focusing on controlling capital expenses and while the market has already adjusted for the anticipated decline in price/mix of vehicles, it may not have fully recognized the continued cash flow potential of ICE vehicles and improved capital allocation strategies, Morgan Stanley added.

The firm said a few key players getting rewarded for a switch in strategy, by returning capital to shareholders instead of investing in building battery plants for electric vehicles and developing software, will create a ripple effect in the industry. It highlighted Ford Motor ( F ) as its "top pick" for capital discipline and shareholder return in the US.

Morgan Stanley expects Tesla (TSLA) to make downward revisions to set off price increases to protect margin, adding that electric vehicle startups may face capital constraints and slow demand in fiscal 2024.

Buybacks by legacy OEMs get rewarded by investors and "capital efficiency and cash return" will be key in driving share price in 2024, the investment firm said.

The investment firm upgraded the US auto industry to attractive from inline.

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