Value stocks favoured, but some tech shares could do well; time now for long-term investment, says UBS

Global brokerage firm UBS continues to back value trade on Wall Street despite the recent surge in technology shares amid the universe of growth stocks. “While the recent rally in the tech sector is encouraging, we continue to maintain a selective approach to longer-term growth stocks and keep our preference for value over growth in the near term,” UBS said in a note. Analysts continue to believe that volatility will remain high across stock markets but in this heightened volatility and backed by the strong correction seen so far in 2022, UBS is of the view that there is good opportunity for long-term investors.

Value over growth

Recent Wall Street movement has seen growth stocks rally from the June lows. The Nasdaq and FANG indexes have rallied around 20% since mid-June. This has been aided by dropping yields and strong quarterly earnings from large technology companies. However, fear of inflation and hawkish US Fed is still not over which pushed UBS to favour value stocks. “But lingering uncertainty around inflation, Fed policy and global growth point toward further outperformance of value stocks, which is why we keep our preference for value over growth for the time being,” they said. UBS also highlighted that global tech valuations are back on a forward price/earnings ratio (P/E) of 21x, well above their long-term average of 19x.

Historic trends also back the value trade. UBS said that data stretching back to 1975 shows that when inflation has been above 3%, value stocks have outperformed growth stocks, regardless of the stage of the economic cycle. However, it is not all doom and gloom for technology stocks according to UBS. Analysts do spot opportunity in select beaten-down growth stocks, such as companies linked to the automation and robotics theme, as well as energy security and carbon reduction, and the recovery in China.

Time to invest for long-term goals

Although in recent weeks have taken control of stock markets, UBS is still of the view that long-term investors should make their bets now. “We believe investing in a diversified portfolio can help investors both mitigate near-term risks and position for long term performance, without running the risk of being left, potentially indefinitely, on the sidelines,” they said.

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Near-term headwinds such as consumer price inflation, hawkish US Federal Reserve remain but UBS is of the view that the potential opportunity cost is large. Analysis by the brokerage firm shows that the S&P 500 is still more than 10% below its all-time high set in January. “By buying, or committing to buy, diversified portfolios today, we believe investors can both mitigate near-term risks and position for long-term performance, while avoiding the risk of being left, potentially indefinitely, on the sidelines,” UBS added.

What to buy?

Value stocks remain the preferred pick followed by quality income, and healthcare stocks. “Investors can manage portfolio volatility with defensive equity exposure via global healthcare or quality income stocks, and selective fixed income exposure. Select hedge fund strategies can help insulate a portfolio from volatility, and a liquidity strategy can help ease near-term selling pressure amid market risk-off events,” analysts said.