- The economy appears to be slowing at an unprecedented pace, and a recession could be coming.
- Keith Parker, the head of US equity strategy at UBS, shared his favorite stock market sectors.
- Here are 22 stocks that UBS analysts have high conviction in, even as the economy weakens.
Concerns about four-decade-high inflation and fading economic growth have catalyzed the S&P 500’s fifth-largest price-to-earnings (P/E) compression since the 1960s, wrote Keith Parker, the head of US equity strategy at UBS, in a July 20 note.
And as stocks have fallen, so has confidence in the economy. In fact, hours before Parker’s note was disseminated, three of his colleagues at UBS hosted a webinar about different recession scenarios for the US and Europe.
“We’re in the midst of a historically fast slowdown,” said Arend Kapteyn, the global head of economics and strategy research at UBS Investment Bank, in the webinar. “We knew that was going to happen. Everyone had it in the forecast, but it is historically rare to lose about 300 basis points of global growth in a single year. So as that then happens, a lot of things just feel very recessionary.”
Markets are pricing in about a 40% chance of a recession in the next six months, Parker noted. His calculation is based on a logistic regression model that determines the implied probability of a downturn based on changes in the S&P 500’s performance and valuation, the equity risk premium, and the performance of different stocks based on quality, value, size, and beta.
“As recession risks loom, understanding what’s priced in and what has already de-rated is increasingly important,” Parker wrote.
In the note, Parker and his fellow strategists analyzed different stock market sectors to determine which look most favorable at this point in the economic cycle, as well as which companies within those sectors stand out.
Top sectors to target
A shakier economic environment warrants a more defensive and selective approach when allocating to stock market sectors, Parker wrote.
With that in mind, UBS upgraded both consumer staples and consumer discretionary to overweight while keeping a bullish rating for technology, healthcare, and energy.
Staples are attractive for several reasons, in Parker’s view: they’re cheap, have strong pricing power, and have better implied returns than other defensive sectors. Discretionary names are trading “near historical lows” on a forward P/E basis, Parker wrote, and he thinks the group will benefit from strong spending, healthy balance sheets, and peaking inflation.
Tech stocks should benefit from stronger relative growth and pricing power, in Parker’s view, adding that fears about valuations as interest rates rise may have peaked. The strategy head prefers software & services names over semiconductors because of their recurring revenue.
Healthcare is another defensive sector that Parker likes. He described the group as “solid at a cheap price” and is bullish about its earnings growth and relative returns. Inelastic demand helps firms in the pharmaceutical, biotech, and managed care industries fare well in recessions.
Energy is more economically sensitive than tech or healthcare but has surprisingly resilient demand during recessions, Parker noted. And despite a massive rally, the group is still cheap when compared to energy futures prices, the strategist wrote.
Meanwhile, UBS downgraded economically sensitive financials and real estate to underweight and kept a negative rating for utilities, materials, and industrials. Financials’ risk-reward prospects are “unattractive” as recession risk rises, Parker wrote, adding that real estate and utilities are both expensive, while the latter two sectors will be hurt by receding inflation.
22 stocks to buy now
In the note, Parker also listed 22 buy-rated stocks that are UBS analysts’ highest-conviction ideas in four of its five preferred sectors: technology, healthcare, consumer discretionary, and consumer staples. Each name is below, along with its ticker, industry, the upside to UBS’s price target (as of July 20), and UBS’s thesis.