- Investors should expect near-term volatility in the stock market as the November presidential election approaches, according to a Thursday note from UBS.
- But in the medium-term, stocks are setting up for more upside thanks to a potential fiscal stimulus deal, easy monetary policy, and positive developments in the healthcare space on COVID-19, UBS said.
- Here’s how investors should position their portfolios for the next leg of the stock market rally, according to the note.
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The stock market is likely to experience volatility in the near term, UBS said in a note on Thursday.
Everything from the upcoming US elections, to heightened tensions between the US and China, to increasing lockdowns in Europe due to rising COVID-19 cases could hurt stocks in the short term.
But in the long term, investors should position their portfolios to benefit from a rising stock market, UBS said.
“A stimulus deal will be struck eventually, central banks will continue to stay supportive, and medical developments still have scope to surprise,” said UBS.
To take advantage of the next leg of the stock market rally, here’s how investors should position their portfolios, according to UBS.
1. US Mid-Caps
Rather than choosing between value and growth, investors can gain more cyclical exposure without underweighting growth by buying mid-cap stocks, according to UBS.
"We continue to expect mid-cap earnings growth to outpace large-caps over the next year, which should be a key driver of the mid-cap call," UBS explained.
2. Emerging Market Value Stocks
Following a decade of underperformance, value stocks within the emerging market space should catch up to their growth peers amid a cyclical recovery, UBS said, adding that these stocks offer attractive dividends in a low interest-rate world.
"Based on past episodes of value catch-up in 2016 and 2018, we think value has the potential to outperform the MSCI EM Index by 10% to 15% in the next 6 to 12 months in up and down markets," UBS said.
3. UK Equities
A rebound in earnings in 2021 could help boost UK equities, according to UBS, which are set to benefit from a global economic recovery from the COVID-19 pandemic and a rise in oil prices. On top of that, UBS sees a Brexit deal more likely than not, which would help UK stocks.
"The UK market is one of the cheapest developed markets in our universe, and it is trading at a 30% discount to the MSCI AC World index, compared with a 10-year average of 10%. The UK sector exposure is skewed toward defensives and healthcare, both of which we see as more resilient," UBS concluded.
4. Global Consumer Brands
A combination of easy monetary policy and fiscal stimulus should support consumer spending post-pandemic, UBS said, noting that income aid from governments isn't being spent on travel and leisure, but instead on durable goods.
"We see global consumer brands as the main beneficiaries of an improving consumer environment, resulting in better earnings growth at reasonable valuations," UBS explained.
"So we recommend investors stay in the market, position for the upside in equities, and use volatility to build long term positions," UBS concluded.