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Investing in value to pre-empt soft-landing

Companies with resilient income and predictable cash flow are likely to be robust in the second half of this year, says the UBS Global Wealth Management chief investment office (UBS GWM CIO).

After a stellar performance over the last five years, growth stocks, especially those in the US, dropped between 40% and 50% in the first six months this year, said the Swiss bank in its mid-year outlook, attended by FSA

In contrast, value stocks, such as those in the financials, energy and telecommunications sectors, have fared relatively better. 

“Value stocks are names which usually have predictable cash flow and will give out dividends. We believe if inflation remain above 3%, value stocks would outperform growth stocks, regardless of the stage of the economic cycle,” said Eva Lee, head of Greater China equities, UBS GWM CIO. 

Global energy 

Although energy stocks have dropped by around 18% since early June as recession concerns began to weigh on markets, UBS expects commodity prices to stay high amid supply challenges. 

Lee therefore places energy stocks on her radar as she believes their current price is yet to reflect the high oil price. 

The Russia-Ukraine war is another factor contributing to the bias towards energy stocks.  

“As the war continues in Ukraine, the sector also acts as a hedge against sanctions constraining supply availability across different commodities,” she added. 

Era of security 

The geopolitical tension in Europe also draws more focus onto food and energy security, said UBS. 

“Global governments have come to realise they can no longer rely too much on external energy sources with global energy demand expected to rise sharply over the next 20 years,” said Lee. 

“The emphasis on energy security, affordability and decarbonisation necessitates heavy investment in new energy sources.” 

The focus on identifying sources of reliable, cheap and clean energy should create long-term investment opportunities for both traditional oil companies and renewable innovators. 

Combined with food security and cybersecurity, these are the three areas which global governments will beef up investments to ensure stability. 

Apac investing 

Within the Apac region, UBS favours countries that are going to benefit from reopening in the second half of this year, such as China, Thailand and Indonesia. 

These countries offer a good balance of laggard catch-up, domestic reopening and global reflation story. 

“China is in an interesting re-rating phase, with sentiment recovering from a very low level as Shanghai reopens and domestic tech tightening seemingly taking a pause although any disappointment with the actual recovery progress will not be easily forgiven,” said Lee. 

“Thailand has a large proportion of its revenue from tourists; Indonesia, on the other hand, will benefit from the strengthening of the US dollar and rising commodity prices.” 

However, upside for Korea and Malaysia is less certain as they are either very sensitive to global economic growth or suffering from weak earnings momentum, UBS added. 

Part of the Mark Allen Group.