Tactical US Fairness Themes: 4 key alternatives
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Tactical US Fairness Themes: 4 key alternatives

The massive story in US monetary markets this yr has been the Fed’s sequence of aggressive rate of interest hikes to tame elevated inflation. This financial tightening and the prospect for added fee hikes within the months forward has put important strain on fairness valuations, although company revenue development expectations have largely held up. However it seems that the cumulative influence of Fed tightening is beginning to have an effect. The housing market has slowed considerably, the US greenback has surged, and a few economically delicate corporations have introduced weaker than anticipated earnings. It seems that there are rising dangers to the company revenue development outlook.

Given this context, we’re closing our “Reopening America” theme. We had opened this theme early within the restoration from the pandemic and—over the previous a number of months—had narrowed its scope to concentrate on segments that had not absolutely recovered, reminiscent of journey and leisure. Demand in these areas nonetheless seems stable, however further Fed fee hikes are a threat to the outlook, particularly if the labor market weakens.

We nonetheless have excessive conviction in our remaining themes. We predict top quality corporations on our “Time for high quality” listing stay very nicely positioned on a relative foundation within the unsure macro setting. These corporations are likely to have extra secure enterprise fashions and generate significant free money circulation. In a extra unsure geopolitical setting, corporations that target safety—protection, vitality, meals, and cyber—ought to have tailwinds, as encompassed by our “Safety take middle stage” theme. There are additionally different pockets of development tied to infrastructure, inexperienced vitality, and digital transformation tendencies, that are captured in our “Resilient spending” theme. Lastly, corporations with robust pricing energy ought to be in a greater place to navigate the turbulent macro setting. These corporations are included in our “Pricing energy standouts” theme.

Extra particulars on all of our themes might be discovered within the full report “Tactical US Fairness Themes: Month-to-month replace – Addendum.”

1. Time for high quality — Prime quality shares are likely to carry out nicely later within the enterprise cycle or when the economic system is in recession. With restricted or no slack within the economic system, it’s clear that the enterprise cycle is considerably mature. This means that traders ought to concentrate on high-quality corporations, which we outline as these with a excessive return on invested capital (ROIC) and secure revenue margins.

2. Safety takes middle stage — Russia’s battle in Ukraine will seemingly have a significant and long-term influence on safety concerns that may have an effect on typical protection spending, our on-line world, in addition to vitality, meals, and semiconductor provides. We establish corporations which might be leveraged to those tendencies.

3. Resilient spending — Companies which might be leveraged to infrastructure spending, renewables, aerospace aftermarket, vitality effectivity, segments of enterprise IT spending, and spending to develop vitality provide ought to stay comparatively well-supported regardless of a extra unsure macro setting.

4. Pricing energy standouts — Elevated enter prices are making a tougher backdrop for a lot of companies. Corporations with pricing energy ought to be higher in a position to go on these prices to shoppers and shield revenue margins. We establish corporations with pricing energy as these with traditionally excessive and secure gross revenue margins and a big market share of their respective industries.

Lastly, we’re closing the Reopening America theme. A lot of the US economic system has absolutely reopened and with financial development slowing, the cyclical nature of the shares on this theme will face higher headwinds. Nonetheless, we imagine choose corporations have the potential to supply good earnings development, and we shift a few of these names to different themes in our thematic suite.

Attain out to your monetary advisor for a replica of the complete repot “Tactical US Fairness Themes: month-to-month replace – Addendum,” a one-stop useful resource to entry CIO’s highest conviction thematic fairness concepts.

Most important contributors: David Lefkowitz, Nadia Lovell, Michelle Laliberte, and Matthew Tormey

This content material is a product of the UBS Chief Funding Workplace.