Interactive Investor

Some help for investors to navigate the rest of 2020

After an unforgettable first half, these City influencers share their outlook for the next six months.

25th June 2020 14:52

Graeme Evans from interactive investor

After an unforgettable first half, these City influencers share their outlook for the next six months.

In a week when heavy selling returned to the FTSE 100 index, investors have been given some useful pointers on how to play what looks likely to be a wild recovery this year.

A mid-year update from UBS Asset Management examines what's next as markets hopefully transition from crash to recovery, including the sectors most likely to bounce back quickly.

The report considers a number of scenarios for economies and capital markets, with the Swiss bank's central case being for a “slow, bumpy return to growth” in the latter part of 2020 that gradually trends back towards normal.

This forecast factors in lingering outbreaks of Covid-19 of the kind we've seen this week, as well the impact of cautionary behaviour by consumers and businesses in the wake of the pandemic.

Some industries have already seen a strong bounce back, with pharmaceuticals among those viewed by portfolio manager Maximilian Anderl as now fully valued. Despite this, UBS continues to favour the sector given its resilience and valuation support.

There's also some encouragement for the energy sector, where emerging signs of supply discipline should eventually result in higher oil prices. However, the cautious outlook for beleaguered airline and tourism stocks is likely to linger for some time.

‘Industrials and semiconductor stocks have some way to go’

Anderl adds:

“We believe opportunities exist in quality cyclicals, most notably software companies and healthcare equip¬ment providers, while industrials and semiconductor stocks have some way to go.”

He also addresses whether investors should be concerned by the increasing dominance of larger stocks in a resurgent US market. Apple (NASDAQ:AAPL) shares, for example, are at a record high, with the tech-laden Nasdaq at one point this week 16% higher for the year despite the impact of Covid-19.

While innovative large companies like Microsoft (NASDAQ:MSFT) and Alphabet (NASDAQ:GOOGL) are highly profitable industry leaders dominating the market, their sales growth is moderate in comparison with smaller players. However, these larger companies differ in that they trade on profit metrics and tend to have very robust balance sheets.

Anderl said:

“At this stage of the cycle, we find large, innovative companies more attractive on risk vs. reward as their free cash flows give them the flexibility and ability to reward shareholders.”

Overall, the magnitude of the rally in risk assets leaves UBS neutral on global equities, with little margin for error on stocks vulnerable to downside risk if the virus returns. 

The bank notes that the S&P 500 index is pricing in a complete earnings recovery by the end of 2021 and trading at valuations rarely seen outside of the dot-com bubble. The report added:

“We prefer equities in markets including Japan and Germany, which are trading at much more attractive valuations.”

Stay nimble and watch gold

Nicole Goldberger, Head of Growth Portfolios at UBS, recommended “staying nimble” and seeking to take advantage of market dislocations and evolving tactical opportunities, while also emphasising diversification for a smoother ride.

She thinks that gold will likely be a relative winner in the event of unintended consequences stemming from enormous and powerful stimulus packages.

Goldberger added: “We favour relative value trades rather than taking large directional bets.

“We prefer to take a barbell approach by selectively adding to early cyclical exposures that we believe have the most room to run in an enduring recovery, while maintaining defensive positions with solid fundamentals looking to protect against a downturn.”

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