UBS Has Game Plan for a Value Rotation, If It Finally Happens
(Bloomberg) -- Quant prognosticators from Bank of America Corp. to JPMorgan Chase & Co. are telling clients to stick with battered value stocks even as they hit fresh lows. Now UBS Group Inc. is sketching a blueprint on winners and losers if the investing strategy finally snaps its losing streak.
Strategist Stuart Kaiser points to underperforming cyclical sectors like energy and automobiles as likely beneficiaries of a risk-on rotation into equities trading with depressed valuations.
Meanwhile, software and hardware companies -- heavily represented in a more-expensive investing style known as momentum -- would likely slump, he said in a note this week.
“You’d want to be long value plus cyclicals plus laggards,” Kaiser wrote in an email Thursday. “Today that points you to ‘buy energy, autos and retailers’ but our view is that you are more likely to see a rotation within sectors because the concept of selling tech to buy those sectors won’t fly with investors.”
Though such predictions have floundered in the past, quants say this time is different because of the potential boost to value from bubble risk in popular styles like momentum and minimum-volatility. Still, Kaiser doesn’t see a mass rotation playing out until later this year.
For now, the coronavirus appears to have dashed a value revival as investors scramble to buy companies with high growth prospects -- traditionally tech -- amid fears of an economic slowdown.
In fact, don’t look for a rotation until there’s a “visible inflection in global growth” which may pushed back to the third quarter, UBS strategists warn. Another scenario for value optimists: a continued bull market that draws cash into cheaper pockets.
Stocks on Kaiser’s “preferred” list of S&P 500 companies that have lower 12-month momentum, higher growth beta and lower valuations include Abiomed Inc., Mylan NV, Mosaic Co., American Airlines Group Inc. and Textron Inc.
For those investing outside the U.S., Kaiser notes that the German, Chinese and Korean stocks are good places to position for an eventual rotation, given their high correlation with certain factors.
“Since DAX is at an all-time high we would look at FXI and EWY in Asia to express this view at the index level,” Kaiser said in his Thursday email, referring to the iShares China Large-Cap ETF and the iShares MSCI South Korea fund.
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