Like a piñata that has been battered mercilessly by a gang of hyperactive kids pumped full of sugar, the stock market is in tatters, after spiraling into the fastest-ever bear market.
Given this fragile and highly uncertain period, investors must be selective, says UBS Global Wealth Management’s Chief Investment Officer Mark Haefele, who issued a playbook Wednesday for how investors should position their portfolios ahead of a rebound.
“The recent rally in equity markets means they are now broadly pricing in our central scenario, in which a subdued U-shaped economic recovery takes hold through the third quarter of 2020 through the first quarter of 2021,” Haefele wrote.
The report focuses on oversold sectors, those that possess “resilient” characteristics, and those offering long-term growth. It also argues that within equities, “global diversification is more important than ever,” given that the coronavirus and its impact will differ country by country.
UBS considers the communication services and IT sectors in the U.S. to be oversold. “The internet giants should be direct beneficiaries of increased online advertising and of individuals staying at home, while the telecom companies provide defensive characteristics for the sector, which should help during equity market turbulence.”
In Europe, UBS favors quality companies, those with high dividend yields, and those selling to emerging markets. “In Europe, we think companies with exposure to emerging markets are in a better position to benefit from a recovery, given that economic activity in China is already starting to normalize.”
In Asia, UBS is bullish on companies with earnings resiliency, strong cash flow, and high dividend yields. It also favors those exposed to the 5G rollout in the region.
“We also recommend secular themes that should benefit from the current situation like fintech, ecommerce, online gaming, and online education, most of which are part of our digital transformation theme.”
However, the report argues that cyclical stocks in Asia are oversold, including China property stocks listed in Hong Kong, and Japanese automation and machinery companies.
More broadly, UBS is positive on global communication services, which can fare well in a cyclical downturn and are benefiting from the, ahem, zooming number of people working from home and the current surge in e-learning.
Given the stick in the spokes nature of the current economic tsunami, investors prize predictability and visibility. Uncertainty is more acute among cyclical companies, which are flying, so to speak, with a weaker radar. For those firms, divining earnings forecasts is particularly challenging.
As such, companies that can deliver “resilient earnings growth” hold greater appeal. “Select consumer staple, healthcare, and communication services companies meet these criteria; their products are consumed daily—in some cases, consumption is even growing—and demand is relatively independent of economic cycles.”
Lastly, among companies that can provide long-term growth, UBS foresees “exciting trends” in the next decade for digital transformation, genetic therapies, and food.
“Enabling technologies, such as 5G, artificial intelligence (AI), and cloud computing will combine with the continued exponential growth in data to power this new era.” The report argues that the pandemic will “accelerate some longer-term trends” that should spur wider adoption of video conferencing, virtual learning, and telemedicine.
E-commerce, already fast-growing, is “benefitting from the recent closing of physical stores, including stocks exposed to online consumption, such as gaming, online retail, and food delivery.”
UBS says genetic therapies will likely “profoundly disrupt” the biopharmaceutical industry and expects increased M&A activity, noting that this group offers the potential for “marked capital appreciation.”
The “food revolution” offers “significant opportunities” for companies that can improve efficiencies in production and through the supply chain. Once the pandemic passes, genetic therapies, plant-based meats and agricultural technologies offer “long-term investment opportunities.”
