India’s surging Covid-19 cases shouldn’t dissuade investors from buying emerging markets equities, UBS Wealth Management says

india covid-19 crisis
A relative of a person who died of COVID-19 is consoled by another during cremation in Jammu, India, Sunday, April 25, 2021.

  • India reported more than 300,000 cases of COVID-19 for the sixth consecutive day on Tuesday.
  • Despite COVID-19 risks, UBS says investors should maintain a risk-on stance to emerging markets.
  • India is geared to global trends and long-term growth, according to Mark Haefele, the CIO of UBS global wealth management.
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In a note to clients on Tuesday, UBS Global Wealth Management’s chief investment officer Mark Haefele said that despite a recent rise in COVID-19 cases in India, emerging markets are still attractive for investors.

On Tuesday, India reported more than 300,000 cases of COVID-19 for the sixth consecutive day.

While case figures in Europe and North America continue to fall, South East Asia has seen a dramatic rise in COVID-19 infections over the past three weeks, according to data from the World Health Organization.

The situation is so dire in India that President Biden has said he will send vaccine supplies, masks, oxygen, and therapeutics to help the country battle the virus.

While Haefele did say rising case figures will be a headwind for the region, the chief investment officer also believes there are “several reasons for a continued positive stance on EM (Emerging Markets) equities.”

Here are the three main reasons why Haefele says investors should be “risk-on” when it comes to emerging markets.

“India’s equity market is geared to global trends and long-term structural growth.”

According to UBS, India now has a nearly 10% weighting within emerging market equity indexes, but that weighting is largely tied to IT companies that do business with the US, so much of it could be shielded from the worst effects of COVID-19.

Additionally, UBS says Indian companies are focused on the long-term growth story and don’t actively trade shares in speculative moves, which bodes well for long-term investors.

Haefele also said that precedence shows COVID-19 surges can be “reined in” within a few months. The firm remains overweight Indian equities.

“China tech regulatory risk appears to be clearing.”

China has a near 40% weighting in emerging market equities, making it one of the most important regions for investors.

UBS believes Chinese tech companies have surpassed recent government regulation hurdles and are poised to post “above-average, double-digit earnings growth” over the medium to long term as investors focus more on fundamentals.

“We see tech regulatory risks receding, with policymakers aiming to constrain monopolistic practices, not curb tech growth,” Haefele said.

“A stronger dollar, higher Treasuries won’t upend EM risk assets.”

Emerging market equities usually struggle when the dollar is strong, but according to Haefele and UBS, the dollar is set to continue on a depreciation trend as the global economic recovery favors “pro-risk” currencies like the Euro.

Haefele also believes the fed will maintain dovish policies and Treasury yields won’t rise above 2% this year, which should help stocks around the world outperform.

Haefele advised positioning for reopening and reflation through value and cyclical stocks in Asia, with a focus on capital goods, construction materials, consumer services, transportation, banks, and metals & mining.

“EM value stocks have traded at a heavy discount over the past decade, leaving room for a recovery rally,” Haefele said.

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These 4 sectors are set to benefit from President Biden’s American Families Plan, UBS says

Joe Biden Stimulus
  • President Biden is set to unveil the second part of his infrastructure-spending package, dubbed the American Families Plan.
  • UBS Wealth Management says greentech, semiconductors, financials, and industrials will benefit from the new bill.
  • The UBS team also believes Biden’s planned tax increases will only mildly affect earnings per share.
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In a new client note, UBS Global Wealth Management laid out four sectors set to benefit from President Biden’s second infrastructure spending bill, dubbed the American Families Plan.

Mark Haefele, the firm’s chief investment officer, said that unlike many market commentators, he doesn’t believe Biden’s infrastructure spending has been fully priced in.

According to Haefele, President Biden’s American Families Plan – together with the American Jobs Plan – could amount to a $4 trillion investment in US infrastructure, and much of it has yet to be accounted for.

Haefele’s UBS team said they believe four sectors will see gains from the historic infrastructure spend: greentech, semiconductors, industrials, and financials.

(1) Green tech

With “a meaningful portion” of President Biden’s infrastructure spending plan dedicated to decarbonization initiatives, UBS expects Greentech companies to be the biggest beneficiary of the incoming record spend.

Companies that operate in electric vehicles, renewable power, clean energy, energy efficiency, and water and electric grid upgrades should perform well, according to UBS.

The suppliers for Greentech firms are also set to outperform during 2021. UBS said it has been “tactically adding exposure” in Greentech firms and their suppliers over the last few months amid a pullback for high-flying tech names.

(2) Semiconductors

President Biden has allocated $50 billion to subsidize domestic semiconductor manufacturing and research in a move to combat China’s growing dominance in the field.

UBS expects this will help US-based manufacturers expand their footprint in 2021 and beyond, making the sector a top pick for investors.

Intel already announced plans to add $20 billion worth of foundry capacity in March.

(3) Industrials

The obvious pick to benefit from infrastructure spending is industrials, and UBS agrees. The wealth management office said steel and aggregate (cement) companies stand to benefit from Biden’s spending.

However, the UBS team also said it cut exposure to steel companies recently due to outperformance in the sector caused by supply imbalances.

The wealth management group said as supply constraints improve over the next year they expect steel companies to “come under pressure.” US Steel is already up nearly 250% over the past year alone.

(4) Financials

Finally, UBS believes the financial sector will benefit from infrastructure spending due to higher interest rates.

The wealth management office said a move toward higher interest rates as the economy reopens will “more than offset” modest drags from tightening regulations.

The team also said they see President Biden’s combined infrastructure plans boosting GDP by 0.5 percentage points and that earnings per share will grow 12% next year thanks to above-trend GDP growth.

Higher taxes, which are expected to pay for at least part of the infrastructure spending, will also only trim S&P 500 profits by about 4% in 2022, based on UBS’ research.

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3 reasons why the recent electric vehicle stock-price correction isn’t the end of the road for the EV trend, according to the world’s largest wealth manager

2022 GMC Hummer EV 1
2022 GMC Hummer EV.

Electric-vehicle stocks have taken a hit the past few weeks amid a rotation away from highly valued tech and growth names, but that doesn’t mean it’s the end of the road for the EV boom, according to Mark Haefele, chief investment officer of UBS Global Wealth Management.

Long-term technological and environmental shifts suggest the boom should continue, while acknowledging that volatility in the share prices of individual companies argues for investors to diversify their exposure. Still, Haefele’s team said investors should consider the underlying data.

Elon Musk’s Tesla has led an incredible boom for electric vehicles over the past few years, and in 2020 alone, sales of electric cars rose 43% while overall car sales slumped 20%, according to data published on Tuesday by EV-volumes.com. The market has grown so much that these days, Tesla is just one of dozens of competitors in the rapidly-expanding industry.

In fact, Tesla’s share of the US EV market fell to 69% in February, down from 81% in the prior year, a Morgan Stanley report found.

It’s getting more crowded, too, as every major car company in the US has said they will be entering the EV market.

General Motors recently pledged to invest $27 billion to launch 30 EV models by 2025, and it has showed off new cars like an electric Hummer, which is set to be released in 2022. Ford released the Mustang Mach-E, which has taken market share from Tesla, and VW recently unveiled its plans to build six “gigafactories” in Europe by 2030 to aid with its EV business.

In China, EV players like SAIC Motor Corporation are targeting the lower-end market with cars starting at just $4,465. The company sold over 25,000 Hong Guang Minis in January alone.

Public transit is also getting a revamp from EV companies. Proterra, a company that makes electric public and school buses, inked a deal to go public via billionaire investor Chamath Palihapitiya’s SPAC Arc Light Clean Transition Corp. in January.

Read more: Buy these 30 stocks that are best-placed to benefit from the pandemic’s ‘seismic shifts’ and continue surging in its aftermath, BTIG says

Many analysts argue the EV boom is set to continue. Wedbush’s Dan Ives said in a recent note to clients that he believes the “EV party and transformation is just beginning as this industry is on the cusp of a $5 trillion market opportunity over the next decade.”

Haefele and his team agree with Ives, detailed below are three reasons why they see a long way to run for the EV boom.

  1. “Electric vehicles continue to rapidly gain market share. Electric vehicle sales have been rapidly gaining market share. The diverging paths of automakers have been confirmed during the pandemic. While the overall auto market contracted by 15% in 2020, global electric vehicle sales rose by 43%, reaching a 4.2% market share. This trend looks set to continue and will benefit pure EV makers, as well as traditional automakers that are adapting fastest to the growing consumer preference for electric vehicles,” Haefele and co. wrote.
  2. “Electrification of vehicles is still ‘The Next Big Thing’ in the automotive industry. Tighter emission regulations mean there is no alternative to the switchover from combustion to electric engines – be they battery electric vehicles (BEV), plug-in hybrid electric vehicles (PHEV), or fuel cell vehicles (FCV). This move toward electric has also been embraced by traditional automakers such as Volkswagen, which has pledged investment of over EUR 50bn in its EV strategy as it aims to catch up with Tesla,” Haefele and co. wrote.
  3. “The transformation underway in the auto sector goes beyond drive trains. We see parallel technological advances in the sector, along with a shift in consumer preferences away from ownership. On technology, progress is being made in areas such as autonomous driving, helped by the rollout of 5G networks. On the issue of ownership, increasing mobile connectivity and changing preferences among younger age groups are leading to the rise of car-sharing models. In the future, using a car will not automatically mean owning one. Overall, we foresee potential sales of some USD 400bn connected to our Smart Mobility theme by 2025, of which electrification represents more than half, an eight- to nine-fold increase on today’s figure,” Haefele and co. wrote.

Read more: An innovation ETF is crushing competitors with 40% returns this year even as tech stocks flounder. The provider breaks down its 2-part playbook for selecting moonshots – and knowing the perfect time to sell

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Fears of inflation are overblown, but it could still trigger near-term stock market volatility, UBS says

trader point

UBS’s chief investment officer of global wealth management says investors should brace for a near-term spike in inflation, but concerns about a long-term rise are overblown.

“…While we think inflation may spike in the near term as pent-up demand meets constrained supply, we believe fears about a persistent rise are likely to prove overdone. However, such concerns could still trigger bouts of market volatility-S&P 500 futures were down 0.7% on Monday-and may test investors’ resolve,” said Mark Haefele in a Monday note to clients. 

The CIO recommends to investors to “keep going cyclical for the recovery,” against this volatile backdrop. Cyclical stocks are those that react positively when the broader economy improves. UBS favors small-and mid-cap stocks globally and US large-cap stocks in financials, energy, industrials, consumer discretionary, and healthcare.

With COVID-19 cases and hospitalizations declining in the US and vaccinations on pace for roughly 2 million shots a day, Haefele expects a wider opening of the US economy in the second quarter of 2021. Congress will likely pass a relief package north of $1.5 trillion before the end of March and the Fed will remain accommodative. Additionally, S&P 500 companies’  fourth quarter earnings exceeded expectations by almost 20%. This should be a positive environment for the cyclical rotation to continue, Haefele said. 

Investors concerned about an uptick in US inflation will be watching the Personal Consumption Expenditures (PCE) price index for January that will be released Friday. 

Meanwhile, UBS economists forecast that while the stimulus out of Washington may be larger than necessary, the package’s effect on inflation “likely will be small.”

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Cryptocurrencies and SPACs show signs of ‘irrational exuberance,’ but the stock market is not in a bubble, says UBS

NYSE Trader Blur
Traders working on the floor of the New York Stock Exchange are blur in this time exposure, just before the opening bell, 11 May, 2004.

  • UBS’s Mark Haefele said in a Friday note that while cryptocurrencies and SPACs show signs of “irrational exuberance,” investors shouldn’t worry that the whole stock market is in a bubble. 
  • Within the IPO and SPAC market and cryptocurrencies, prices are discounting future rapid price appreciation, a factor that’s typically present during market bubbles, said Haefele.
  • But large parts of the stock market are not expensively valued by historical comparison, the chief investment officer of global wealth management said. 
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While many parts of the market are showing signs of  “irrational exuberance” that should alarm some investors, UBS’s Mark Haefele says there are still some risk assets outside of bubble territory.

“All of the bubble preconditions are in place,” he explained in a Friday note, citing record low financing costs, new participants entering into the market, and a combination of historically low interest rates and high savings rates from government stimulus that’s left investors who are searching for returns with no alternative but equities.

However, Haefele said that while parts of the market seem speculative, investors shouldn’t worry that the whole market is in a bubble.

“The cryptocurrency markets are exhibiting signs of excessive speculation and the IPO/SPAC markets are the hottest in two decades. But these markets do not yet pose a broader systemic risk,” the chief investment officer of global wealth management said.

Within the IPO and SPAC market, as well as crypto, prices are discounting future rapid price appreciation, a factor that’s typically present during market bubbles, said Haefele.

Speculation is pushing up prices for bitcoin, especially as major investors raise their long-term price targets for the coin, like Guggenheim’s Scott Minerd who sees bitcoin hitting $400,000 in the future.

Read more: GOLDMAN SACHS: Buy these 25 stocks best-positioned to juice profits in 2021 as stimulus and vaccine progress spur economic growth

First-day IPO performance is also the strongest in around two decades. Airbnb leaped 115% on its first day of trading, while DoorDash opened 78% higher than its offer price. SPACs raised more than $70 billion in 2020, more than the entire prior decade combined, he said.

But equities as a whole are not in a bubble, said Haefele. For one, he explained that large parts of the market are not expensively valued by historical comparison. Removing Facebook, Amazon, Apple, Microsoft, Netflix, and Google, the S&P 500 only rose 6% in 2020. 

He also said that valuations of indices look reasonable against the backdrop of low interest rates, and used an equity risk premium approach to explain why stocks still look cheap relative to bonds. 

Against that backdrop, he recommends investors “think beyond the bubbles.”

“One reason that bubbles can be so deceptive is that there is often a grain of truth behind their narratives. The dotcom bubble, for example, correctly anticipated the impact of the internet,” said Haefele. “Many of the narratives linked to today’s bubbles may also prove to be correct. Investors may be able to capture some upside but reduce the risk associated with bubbles by identifying the narrative, yet investing in a more diversified way.” 

He reiterated his suggestion to investors to buy emerging technology investment themes like 5G, fintech, greentech, and healthtech, while staying diversified. He also said UBS is bullish on emerging market stocks.

Read more: ‘Extremes are becoming ever more extreme’: A Wall Street strategist who sounded the alarm before last year’s 35% crash showcases the evidence that a similar meltdown is looming

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