Associated Press
- Investors can still count on strong spending by consumers as uncertainty around trade rises, says Jeremy Zirin, the head of equities Americas for UBS.
- He recently upgraded the consumer staples sector, which held up fairly well Friday as major stock indexes plunged, and is optimistic about consumer discretionary companies as well.
- Zirin says higher prices and innovation are good news for companies that make household goods and other basic necessities. So is the sector’s defensive focus as uncertainty around trade rises.
- He downgraded tech stocks because of the worsening tariff war as well as their high valuations, and also downgraded energy companies, which look vulnerable if trade tensions harm the global economy.
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There’s a saying that when the going gets tough, the tough go shopping.
That’s also nearly the reasoning of Jeremy Zirin, the head of equities Americas of UBS. He says he’s focusing investments that take advantage of consumer spending as the US-China trade war gets worse.
About 70% of the US economy is linked to consumer spending, and that area has remained generally healthy during the trade war even as other areas like manufacturing have grown weaker.
"Given current sector valuations, rising macro risks, geopolitical uncertainty, and expected elevated market volatility, we shift our sector strategy to a more defensive stance favoring sectors most leveraged to a healthy US consumer and reducing exposure to sectors most exposed to the global economy," he says.
As a result, Zirin is upgrading the defensive consumer staples sector to "moderate overweight" from "neutral." He’s also keeping a "moderate overweight" rating on the consumer discretionary sector, which he says should also benefit as spending keeps growing.
"US consumer spending should remain healthy given a still-expanding labor market, rising wages, strong consumer balance sheets, and low gasoline prices," Zirin writes.
He adds that low mortgage rates should help companies exposed to the housing industry, and the largest companies in the discretionary sector are taking steps such as raising prices and cutting costs to offset the effects of President Trump’s upcoming tariffs.
The upgrade of staples companies reflects both their link to US consumer spending and their defensive qualities in a volatile time.
"The consumer staples sector is among the more defensive sectors and should perform well in a choppier market as investors reward companies with stable cash flows," he says.
True to form, that sector held up relatively well Friday as the market plunged after China announced new tariffs on imports from the US — a decision that prompted swift retaliation from President Trump. The upgrade came before that news broke.
But there are good signs for household goods makers and other staples companies beyond healthy consumer spending, in his view. Zirin adds that some of the biggest companies have raised prices and introduced innovative new products. And after years of falling sales, there are signs that revenue trends are improving.
This chart adds another positive factor for the sector, as Zirin says the prices of staples stocks look reasonable at this stage of the economic cycle.
FactSet and UBS
As part of his cautious stance Zirin also upgraded the defensive, bond-proxy real estate sector to "neutral" from "moderate underweight" as interest rates are likely to head lower.
Trouble for tech
His growing caution around the trade war underpins his downgrade of tech and energy, which have far more international exposure, to "moderate underweight" from "neutral."
Tech stocks have trounced the overall stock market this year, and Zirin argues that the sector is vulnerable those high valuations are combined with weakening performance. That’s demonstrated in this chart, which shows that net income for companies in tech slowed last year and is now in decline.
FactSet and UBS
"Investors have looked through some of the near-term fundamental issues plaguing the sector—particularly soft end-market demand for semiconductors and smartphones—and are pricing in a late 2019 or early 2020 rebound in these areas," he says.
That sets the sector up for trouble if that rebound doesn’t materialize.
The tech sector is especially vulnerable to upcoming rounds of tariffs. Energy companies, meanwhile, won’t be hit by tariffs but will be harmed if growing trade tensions hurt the global economy.
"A slowing global economy as a result of the increased tariffs will reduce demand and may be a headwind for oil prices," he says. He already has an "underweight" rating on industrial companies for the same reason.
See Also:
- An investment chief overseeing $294 billion tells us the 3 areas she’s using to play defense against rising recession risks — and how she’s targeting the growth that remains
- JPMorgan’s quant guru says the main driver of recent stock turmoil has nothing to do with recession fears — and explains why it’s now a bullish force
- A millennial who manages $450 million for the ultrarich explains why her generation feels uncomfortable in the financial system — and outlines how they can invest with confidence
Source: Business Insider – mjay@businessinsider.com (Marley Jay)