After last week’s dramatic stock market rout investors are searching for ways to capitalize.
Some of five main “areas of opportunity” are emerging market equities, digitally-focused “long-term winners”, and oversold U.S. sectors and stocks UBS said.
Wall Street suffered its worst week since the 2008 financial crisis last week as fears over the global spread of coronavirus sent stocks tumbling. All three major U.S. indexes reached correction territory – a fall of more than 10% from a recent peak.
The Dow Jones Industrial Average DJIA, +3.05% fell 12.4%, while the S&P 500 SPX, +2.74% dropped 11.5% and the Nasdaq COMP, +2.73% declined 10.5%. Stocks stabilized on Monday as central banks around the world lifted hopes of interest-rate cuts to support the global economy.
After such a brutal week of losses investors should exploit these five areas, UBS analysts, led by global chief investment officer Mark Haefele, said in a note.
Emerging market stocks
Emerging market stocks have outperformed development market equities in recent days as the number of daily new cases in China continues to slow, while the virus spreads across Europe. Emerging market equities outperformed the S&P 500 by 5.75% last week, the note said. UBS analysts said they were overweight on emerging market equities, and particularly China, but more cautious on the Eurozone.
Buy oversold stocks
“We highlight a number of sectors that we think have now been oversold, including U.S. consumer discretionary [sector], where stocks are down 11% in the last five trading days despite strong housing data,” Haefele said.
The UBS team also favored the U.S. communication services sector, which includes Disney DIS, +0.14% , Netflix NFLX, +1.52% , Twitter TWTR, +9.04% and Google parent GOOG, +1.71% which it said was likely to be more defensive as well as being potential “beneficiaries” as people spending more time at home due to the virus spread.
In Europe they looked to stocks that could benefit from China’s stabilization, as new COVID-19 cases decline.
Buy long-term winners
The virus outbreak will “accelerate” longer term secular trends, and the UBS analysts said they saw a considerable upside for companies focused on digital transformation. “The COVID-19 outbreak has given an additional impetus toward remote working, and engagement with online business models in China has increased significantly during the outbreak,” they said. It has also driven advances in genetic technologies and the understanding of virus spread.
Prepare your portfolio for the virus fight
Poorly diversified portfolios will endure a “bumpier ride” in the weeks to come, the Swiss investment bank’s analysts said. “The crisis has shown the effectiveness of holding a mix of equities, bonds, and alternatives in a portfolio, with strong performance from bonds helping cushion declines in equities,” they said. Gold was also recommended by the team as a portfolio hedge.
Improve your yield and take advantage of the volatility
The yield on the 10-year U.S. Treasury fell to fresh record lows of 1.03% on Monday as major central banks raised expectations of rate cuts. “Against this low-yield backdrop, investors will need to consider strategies that can enhance that yield in portfolios, such as dividend-paying stocks and European bonds in the crossover zone between investment grade and high yield,” the analysts said.