It’s been a better week for equity bulls. Indications of peak misery among fund managers were grasped as evidence that things can only get better, and the S&P 500
SPX,
+0.99%
is up 4.4% over just the last three sessions. But the Swiss bank UBS remains cautious.
“We don’t expect a sustained improvement in market sentiment until investors get greater clarity on the outlook for the economy, central bank policy, and political risks. Uncertainty in all of these areas remains elevated, in our view,” wrote a team of strategists led by Mark Haefele, global wealth management chief investment officer. So, what to do? Adopt a four-pronged strategy that should prove resilient under various downbeat scenarios, they say. First off, invest in value. “Inflation is set to remain above central bank targets in 2022. Based on analysis from 1975, value sectors tend to outperform growth stocks when inflation is above 3%, which is likely to be the case for some time,” says UBS. Under a soft landing scenario investors should favor value’s cyclical sectors, including energy
XLE,
-1.75%.
Look at the U.K. market
EWU,
+0.41%
UKX,
+0.18%,
which is highly weighted to value plays. The pound
GBPUSD,
-0.34%,
currently around $1.20, sits near the lows of a multi-decade range, adding to the bargains.
Second, pick up defensives and quality to protect against a more damaging downturn, they say. “We believe investors should add exposure to quality-income stocks, the healthcare sector, resilient credits, and the Swiss franc.” Next, investors should ensure their portfolio has sufficient liquidity to take advantage of opportunities and diversify. “This will likely consist of a mix of cash, cash alternatives, and short-duration bonds. Investors should also ensure an adequate allocation to hedge funds, which have the potential to deliver performance, even if both bonds and equities are falling.” Finally, position for the era of security as the fallout from the Ukraine war encourages governments to prioritize safety and access to supplies over considerations of price and efficiency. This is likely to make as diverse a selection as energy, food and cybersecurity more attractive, UBS concludes.The markets
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