- The economic system seems to be slowing at an unprecedented tempo, and a recession may very well be coming.
- Keith Parker, the pinnacle of US fairness technique at UBS, shared his favourite inventory market sectors.
- Listed below are 22 shares that UBS analysts have excessive conviction in, even because the economic system weakens.
Issues about four-decade-high inflation and fading financial development have catalyzed the S&P 500’s fifth-largest price-to-earnings (P/E) compression for the reason that Nineteen Sixties, wrote Keith Parker, the pinnacle of US fairness technique at UBS, in a July 20 observe.
And as shares have fallen, so has confidence within the economic system. In actual fact, hours earlier than Parker’s observe was disseminated, three of his colleagues at UBS hosted a webinar about totally different recession eventualities for the US and Europe.
“We’re within the midst of a traditionally quick slowdown,” mentioned Arend Kapteyn, the worldwide head of economics and technique analysis at UBS Funding Financial institution, within the webinar. “We knew that was going to occur. Everybody had it within the forecast, however it’s traditionally uncommon to lose about 300 foundation factors of world development in a single 12 months. In order that then occurs, plenty of issues simply really feel very recessionary.”
Markets are pricing in a few 40% probability of a recession within the subsequent six months, Parker famous. His calculation is predicated on a logistic regression mannequin that determines the implied likelihood of a downturn primarily based on modifications within the S&P 500’s efficiency and valuation, the fairness threat premium, and the efficiency of various shares primarily based on high quality, worth, dimension, and beta.
“As recession dangers loom, understanding what’s priced in and what has already de-rated is more and more essential,” Parker wrote.
Within the observe, Parker and his fellow strategists analyzed totally different inventory market sectors to find out which look most favorable at this level within the financial cycle, in addition to which firms inside these sectors stand out.
High sectors to focus on
A shakier financial setting warrants a extra defensive and selective method when allocating to inventory market sectors, Parker wrote.
With that in thoughts, UBS upgraded each client staples and client discretionary to chubby whereas holding a bullish ranking for expertise, healthcare, and power.
Staples are engaging for a number of causes, in Parker’s view: they’re low-cost, have robust pricing energy, and have higher implied returns than different defensive sectors. Discretionary names are buying and selling “close to historic lows” on a ahead P/E foundation, Parker wrote, and he thinks the group will profit from robust spending, wholesome steadiness sheets, and peaking inflation.
Tech shares ought to profit from stronger relative development and pricing energy, in Parker’s view, including that fears about valuations as rates of interest rise might have peaked. The technique head prefers software program & providers names over semiconductors due to their recurring income.
Healthcare is one other defensive sector that Parker likes. He described the group as “stable at an affordable worth” and is bullish about its earnings development and relative returns. Inelastic demand helps companies within the pharmaceutical, biotech, and managed care industries fare nicely in recessions.
Power is extra economically delicate than tech or healthcare however has surprisingly resilient demand throughout recessions, Parker famous. And regardless of a large rally, the group remains to be low-cost when in comparison with power futures costs, the strategist wrote.
In the meantime, UBS downgraded economically delicate financials and actual property to underweight and saved a destructive ranking for utilities, supplies, and industrials. Financials’ risk-reward prospects are “unattractive” as recession threat rises, Parker wrote, including that actual property and utilities are each costly, whereas the latter two sectors will probably be harm by receding inflation.
22 shares to purchase now
Within the observe, Parker additionally listed 22 buy-rated shares which are UBS analysts’ highest-conviction concepts in 4 of its 5 most well-liked sectors: expertise, healthcare, client discretionary, and client staples. Every title is beneath, together with its ticker, business, the upside to UBS’s worth goal (as of July 20), and UBS’s thesis.