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
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.
Look at the U.K. market
EWU
UK:UKX,
which is highly weighted to value plays. The pound
GBPUSD,
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
Nasdaq 100 futures
NQ00
fell by 0.6% to pace a downturn in stock futures. The S&P 500
ES00
contract also was weaker. U.S. crude oil futures
CL
fell 0.8% to $95.72 a barrel, while gold
GC00
added 0.6% to $1,723 an ounce.
U.S. 10-year Treasury yields
BX:TMUBMUSD10Y
are easing 7.1 basis points to 2.811% as recession worries are revived.
The buzz
Shares of Alphabet
GOOGL,
which owns Google, and Meta
META,
which owns Facebook, are down sharply in premarket trading after Snap
SNAP
warned of a slowdown in digital advertising. Such is the uncertainty, Snap declined to offer guidance on earnings and its stock plunged 28.3% to $11.72.
Friday results include Twitter
TWTR,
Verizon
VZ,
American Express
AXP,
and Schlumberger
SLB.
Italy will hold a snap election in September after Prime Minister Mario Draghi resigned after his governing coalition crumbled. The Germany/Italy 10-year bond yield spread widened to 233 basis points, signaling increased market stress.
The euro
EURUSD
fell back toward dollar parity, losing 0.7% to $1.0158, after surveys showed Germany’s manufacturing and service sectors contracting in July.
U.S. wheat futures
W00
fell 2.8% to $7.83 a bushel, back below levels seen before Russia’s invasion of Ukraine, as hopes rise that a deal will soon be signed to resume exports of Ukrainian grain.
The U.S. Markit PMI manufacturing and services surveys are set for release at 9:45 a.m. Eastern
The chart
Tesla
TSLA
shares jumped 9.8% on Thursday after revealing well-received results. Elon Musk’s carmaker now has a market value of $885 billion. That’s more than the next 11 biggest automakers combined, suggesting Tesla will thoroughly dominate the EV space in the future. The table below shows what analysts at S&P Global Mobility think will happen to the sector in coming years.
Source: S&P Global
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