A sign from the Swiss banking giant UBS can be seen in a branch in Zurich on October 26, 2018.
Fabrice Coffrini | AFP | Getty Images
UBS Global Wealth Management sees global equity markets on an uptrend of 5% to 10%, with emerging markets, financials, energy stocks and small caps being the best places to capitalize.
In a monthly investment call on Tuesday, UK CIO Caroline Simmons said analysts had particularly preferred emerging markets in Asia and China. It also supported cyclical stocks and value stocks – those whose performance coincides with the economic recovery or those with valuations that are below their financial condition would justify this.
This is based on expectations that the economic recovery will expand and accelerate over the course of the year to continue to support a rotation of soaring growth sectors such as technology in sectors that benefit from accelerating industrial production and rising inflation.
“Small caps tend to be more cyclical than larger caps in terms of their industry structure, so they are more convergent with the economic recovery and their valuations remain attractive,” Simmons said on the conference call.
“The price-to-book ratio of the MSCI Small Cap (index) compared to the MSCI World is almost two standard deviations below the long-term average, so that the small caps, although they have already performed quite strongly since November, are still attractively priced.” “
It found that financials had lagged the S&P 500 by around 5% since late 2019, but recently made a comeback as the rotation of values and inflation expectations picked up pace.
A recent surge in benchmark yields on 10-year US Treasuries and other bond yields around the world has created volatility in equity markets as investors began to question the valuations of growth-based sectors that are vulnerable to higher interest rates.
The 10-year return was around 1.6209% in Europe on Thursday morning, but UBS predicts it will be around 2% by the end of the year.
“Higher yields and steeper yield curves are generally more helpful for financial stocks. They add to their net interest margins and they generally see improvement in bad loans too,” Simmons said.
She added that if bad debt provisions were viewed as excessive relative to the reality of credit losses, financial gains would benefit while valuations remain low compared to the rest of the market.
Meanwhile, since the Tuesday afternoon call, energy stocks had outperformed the S&P 500 by around 33% since late 2019, and UBS believes there is a lot of catching up to do. The Swiss lender predicts that crude oil prices for Brent will hit $ 75 a barrel by the end of the year, and Simmons noted that energy companies offer strong cash flows and dividend yields.
The international reference Brent crude oil futures were trading at $ 63.60 on Thursday morning.
Violation of bond yield
While rising bond yields have caused some market turmoil, Simmons argued that a sustained rise would not necessarily mean the end of stock gains.
“In the past 25 years, there have been 10 periods when 10-year government bond yields have risen more than 100 basis points, and in all of these cases global stocks have delivered flat or positive returns,” she said.
In a letter to investors on Monday, Mark Haefele, CIO of UBS Global Wealth Management noted that rising inflation expectations tend to lower equity risk premiums as well, but added that “all other equal, higher returns are a headwind for equity valuations.
Haefele emphasized that the current valuations are above the long-term average of the equity risk premium despite rising returns. An equity risk premium is the return on a given asset in excess of the risk-free return.
“We don’t think inflation or returns are a risk. What I am going to say is that if returns go up significantly, perhaps above 2.25% in the US, it may, and then would, have an impact on the valuation of stocks there will be a discussion about whether or not earnings growth is strong enough to offset a valuation effect, “said Simmons.