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UBS: Sticking to year-end target, stay overweight defensives

Published 06/08/2024, 13:34
© Reuters.

UBS analysts remain confident in their year-end target for the MSCI AC World index, aiming for 830, which indicates about a 5% upside from current levels.

Despite recent market turbulence, they advocate maintaining an overweight position in defensive stocks, particularly within Europe.

The analysts identified four catalysts for the recent market events: weak U.S. economic data, concerns over tech valuations and AI capex, an unexpected move by the Bank of Japan, and the absence of aggressive stimulus from China.

They noted that "July/August sell-offs of 10%+ are not that unusual" and can often reverse quickly, although they sometimes precede bear markets, as seen in 2008.

UBS highlighted several supports for their optimistic outlook: "Risk Appetite is now 0.4 std below average," and the VIX has risen significantly, suggesting an overreaction compared to credit spreads.

The bank also noted that the equity risk premium (ERP) is at 4.7% and could rise to 5.4% if generative AI boosts productivity growth. Moreover, credit spreads are twice the default rate, indicating stability.

From a regional perspective, UBS prefers Europe due to its relatively cheap valuations, noting that "valuations in Europe are abnormally cheap." They also see the UK as a safe haven, performing well when markets fall or defensives outperform.

In terms of sectors, UBS continues to favor growth defensives. They argue that cyclicals are not cheap and are pricing in higher PMIs, which may not materialize. However, they see value in banks and the European consumer sector, which benefits from falling oil prices and inflation rates.

Overall, UBS recommends staying overweight on defensives, particularly in Europe, while maintaining a cautious stance on cyclicals given the current economic uncertainties.

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