UBP semi-annual outlook spots US equity opportunities

Claudio Borrelli, UBP’s head of equity research, has said he continues to find a wealth of attractive opportunities in the US, despite European equities being less expensive then their US peers.

For several quarters now, forecasters, analysts and the media have been steadily churning out disaster scenarios about Europe. Whilst the region is still plagued by some deep-seated problems, the markets seem to have factored them in and risk premiums on some assets have dropped.

According to UBP, financial markets have begun to pick up and are probably right to be optimistic because the trend in the economy seems to be reversing : monthly indicators are showing better data than expected, such as falling unemployment in Spain and a rebound in corporate sentiment.

“Perhaps it is time to reassess our view of Europe and adopt a more positive outlook. The reforms implemented since 2008 and the determination shown by many governments – especially in the ‘periphery’ – are paving the way out of the recession and towards a rebuilding of Europe”, said Alan Mudie, UBP’s chief investment officer.

“This battery of measures is very positive. However, the market remains sceptical, which is creating an opportunity. Given this we prefer equity markets, and in particular European equities, which have great potential,” he added.

More specifically for Italy, the country has engaged in structural reforms, but their effect on productivity and labour costs are still to be see, UBP said.

The country also benefits however from a primary surplus, which is a great advantage. Alan Mudie commented: “The risk premiums on Italian debt should decrease further. In the current context, Italian sovereign bonds offer attractive investment outlooks, as long as short duration is favoured”.

“Equity valuations are not that expensive which is supportive of further upside”, said UBP’s head of equity research, Claudio Borrelli.

While European equities are less expensive than their US counterparts, Claudio Borrelli said he continues to find a wealth of attractive opportunities in the US.

Real estate and financial markets offer interesting investment opportunities, and “corporate America is showing rock-solid health,” he said.

Borrelli highlighted certain sectors, saying that “earning revisions are strong and bode well for consumer discretionary, financials and information technology”. Through this prism, an array of investment themes have been identified:

   – Global leaders: companies with solid balance sheets, high dividend yields, stable to growing payout ratios and low sensitivity to cyclicality

   – M&A: given the financial strength of a number of companies, merger & acquisition candidates are a theme to be “played”

   – Chemicals: US chemical companies benefit from a competitive advantage, due to cheap natural gas liquids (ethane, propane) and low energy costs

   – Luxury goods producers benefit from the structural growth of emerging markets and still have untapped potential in some large developed markets, such as the US

   – Lastly, e-commerce represents only 6.5% of global retail and faces solid growth expectations (sales increases of +20% per annum)

Analysts are still bullish, but recommend careful stock-picking

As their economies are rebalancing from being export-driven to being consumer-driven, emerging markets growth has slowed down in the past months. Whilst it is expected to rebound in coming years, it will probably remain below the boom-year levels of the past decade. This, however, should be seen as a positive element, as it supports the declining inflation trend and offers a more sustainable outlook, UBP said.

From an investor viewpoint, the main concern remains global markets and US interest rate fluctuations, as expectations on US monetary policy and Treasury yields dominate investor confidence. “Having this in mind, investors should differentiate across asset classes and become more tactical in their approach”, explained Denis Girault, head of EM fixed income at UBP.

In this context, he advised exposure to EM high yield corporate bonds, since they are less correlated to Treasuries and offer a spread cushion against US Treasury rate fluctuations.

Local currency debt also offer an attractive yield, even though currencies tend to be affected by uncertainties surrounding the US dollar. With this in mind, Denis Girault concluded, “as often, diversification is key”.

 

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