- The economy appears to be slowing at an unprecedented rate and a recession could occur.
- Keith Parker, head of US equity strategy at UBS, shared his favorite stock sectors.
- Here are 22 stocks that UBS analysts are confident about, even as the economy weakens.
Concerns about inflation at a four-decade high and weakening economic growth catalyzed the S&P 500’s fifth-largest price-to-earnings (P/E) squeeze since the 1960s, wrote Keith Parker, head of US equity strategy at UBS, in a July 20 Notice.
And as stocks fell, so did confidence in the economy. In fact, hours before Parker’s memo was released, three of his UBS colleagues hosted a webinar on different recession scenarios for the US and Europe.
“We are in the midst of a historically rapid downturn,” Arend Kapteyn, global head of economics and strategy research at UBS Investment Bank, said during the webinar. “We knew this was going to happen. Everyone had it in the forecast, but it’s historically rare to lose around 300 basis points of global growth in a single year. So while that’s happening, a lot of things seem very recessionary.”
Markets are pricing in about a 40% chance of a recession over the next six months, Parker noted. Its calculation is based on a logistic regression model that determines the implied probability of a downturn based on changes in the performance and valuation of the S&P 500, the stock risk premium, and the performance of different stocks as a function of quality. , value, size and beta.
“As recession risks loom, it’s increasingly important to understand what’s priced in and what’s already been downgraded,” Parker wrote.
In the note, Parker and his fellow strategists analyzed different stock sectors to determine which ones look most favorable at this point in the business cycle, as well as which companies in those sectors stand out.
Main sectors to target
A more fragile economic environment warrants a more defensive and selective approach when allocating to equity sectors, Parker wrote.
With this in mind, UBS has upgraded both basic consumption and consumer discretionary overweight while keeping a bullish rating for Technology, Health careand energy.
Commodities are attractive for several reasons, according to Parker: they are cheap, have strong pricing power and have better implied returns than other defensive sectors. Discretionary names are trading “near all-time lows” on a forward P/E basis, Parker wrote, and he believes the group will benefit from strong spending, healthy balance sheets and a spike in inflation.
Tech stocks should benefit from relative growth and stronger pricing power, according to Parker, adding that fears about valuations as interest rates rise may have peaked. The chief strategist prefers software and services names to semiconductors because of their recurring revenue.
Health is another defensive area that Parker likes. He described the group as “solid at a bargain price” and is optimistic about its earnings growth and relative returns. Inelastic demand helps companies in the pharmaceutical, biotech, and managed care sectors fare well during recessions.
Energy is more economically sensitive than technology or healthcare, but has surprisingly resilient demand during recessions, Parker noted. And despite a massive rally, the group is still cheap relative to energy futures prices, the strategist wrote.
Meanwhile, UBS downgraded economically sensitive finance and immovable to be underweight and kept a negative rating for utilities, materialsand industrial. The risk-reward outlook for financials is “unattractive” as recession risk rises, Parker wrote, adding that real estate and utilities are both expensive, while the latter two sectors will be hit by the recession. fall in inflation.
22 stocks to buy now
In the note, Parker also listed 22 buy-listed stocks that are UBS analysts’ most compelling ideas in four of his five favorite sectors: Technology, Health care, consumer discretionaryand basic consumption. Each name is below, along with its ticker, sector, UBS price target rise (as of July 20), and UBS’s thesis.