vk.com/id446425943
Global Research |
13 November 2018 |
US Equity Strategy
De-rating and deceleration: how to invest for 2019?
After big de-ratings: 16% avg S&P returns, ~40% reversal of sector/IG returns
The S&P 500 P/E has declined by over 2x in 2018 as increased risks around higher rates, tariffs and slowing growth have been priced. In years following a P/E decline of >1x, S&P 500 returns have averaged 16% as the P/E has recouped ~30% of the decline. We have also found that ~40% of sector and industry group (IG) relative returns have reversed in the year after de-rating. Therefore, we selectively position for a potential catch-up trade. The selloff in October was much bigger than the 5%+ type pullback we thought was likely (link), but we still see equities higher to year end. We target 3200 for the S&P for 2019 year end on 7% EPS growth and a rise in the P/E, in line with history after de-ratings. No further trade escalation, solid but slowing growth and moderately higher rates underpin our view.
For deceleration: ISM cycle is a guidepost for market peak, leadership, rotations
We analyze market, sector, IG and style returns since 1955 and 1984 for 4 phases of the ISM mfg cycle using 52.5 as the transition point: 1) low ISM below 52.5 but rising, 2) high/rising, 3) high/falling (current phase), and 4) low/falling. S&P returns at this stage have been sizeable with a typical peak after the ISM falls below 50. The avg 14m length of this phase would point to a market peak after Oct-19, using Aug-18 as the ISM peak. Healthcare, Tech and Utilities have outperformed on avg when the ISM was high/falling, with Materials, Autos and Semis the worst performers. At a style/factor level, momentum, quality, and growth should lead at this stage, but they are not cheap. Large caps outperform and value tends to lag but FCF does well. ISM <52.5 next year would be a signal to rotate more defensively and also into early cycle value.
How is this cycle different? Fundamental drivers of growth can persist
Outside of the obvious fact that this bull market and economic expansion are over 9 yrs old, there are other differences between this cycle and past ones: 1) protectionism is a factor; 2) leverage has shifted, watch small corps; 3) consumer savings rate > prior cycle highs; 4) US investment/GDP is below avg; 5) margins are high but productivity is not; 6) with no repatriation tax, dividends can jump; 7) financial conditions are supportive, cycles end when rates > nominal GDP. We assess the balance of risks around each.
What's priced? De-rating of 2018 vs. key drivers for 2019
To assess whether the de-ratings in 2018 are justified given fundamentals, we create 2019 composite scores for sectors, IGs, and styles based on key themes: 1) ISM cycle returns, 2) margin risk, 3) trade risk, 4) dividend upside, 5) momentum+growth, 6) corp sentiment, 7) quality+FCF. Relative de-ratings are ~50% correlated to our composite scores, so some relative risk/upside is priced. Sectors/IGs with a positive fundamental vs. value trade-off are: Healthcare, Pharma/Bio, Consumer Svcs, Retail, Comm Svcs, Media&Enter, Industrials, Cap Goods, Transports, Energy, Insurance. Those with the most negative trade-offs are Materials, Autos, REITs, Food&Stap Retail, HH Products.
How to invest for 2019? Sectors/IGs, styles/factors, baskets for key themes
We remain positive going into 2019 but try to control for the risks. We look for a relative catch-up and value amongst the cyclicals. We upgrade Energy tactically to o/w and pair with Materials (u/w) for a 100bp higher div yield and oil cycle upside. We also pair Comm Svcs (o/w) and Industrials (o/w) over Tech (u/w) given similar revisions/ growth but a ~20% relative de-rating. For defensives, we stay o/w Healthcare and u/w REITs and Utilities. We prefer quality, large>small and would buy the dip in momentum/ growth for this stage of the cycle. Lastly, we highlight 4 baskets to capitalize on the key themes: 1) Laggards with solid fundamentals to catch up, 2) Dividend growth upside, 3) High momentum+growth to lead, 4) Low momentum/ growth to lag.
www.ubs.com/investmentresearch
Equity Strategy
Americas
Keith Parker
Strategist keith-j.parker@ubs.com +1-212-713 3296
Neal Burk
Associate Strategist neal.burk@ubs.com +1-212-713 4066
This report has been prepared by UBS Securities LLC. ANALYST CERTIFICATION AND REQUIRED DISCLOSURES BEGIN ON PAGE 44. UBS does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.
vk.com/id446425943
Contents |
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The big de-rating of 2018: what next?........................................... |
3 |
16% median returns in year after de-rating ................................................. |
3 |
P/E has recouped ~30% of fall, ~40% of industry returns reversed ............. |
4 |
S&P 500 target of 3200, on EPS +7% in '19................................................ |
5 |
De-rating exceeded rise in rates, late cycle discount ..................................... |
7 |
Framing upside and downside using scenario analysis.................................. |
8 |
De-rating vs. key themes/drivers: what's priced? ........................................ |
10 |
Sector, industry and style recommendations .............................................. |
13 |
Market returns in perspective: what does history tells us?........ |
17 |
Late cycle returns have been sizeable......................................................... |
18 |
ISM peak to midpoint (~52.5): ~9% type returns....................................... |
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ISM is a guidepost for sector and style investing ........................................ |
20 |
Leadership persists, losers lose big, dispersion rises .................................... |
22 |
How is this cycle different? Fundamental drivers can persist .... |
25 |
Protectionist pendulum is swinging............................................................ |
25 |
Leverage has shifted: watch small corporates............................................. |
27 |
Consumer savings rate > prior cycle highs ................................................. |
28 |
Investment % of US GDP is below average ................................................ |
29 |
Margins are high, but productivity is not.................................................... |
30 |
Payouts have no tax wall, dividends can jump............................................ |
31 |
Financial conditions supportive: cycles end when rates > nominal GDP ...... |
32 |
Key themes: how to invest for 2019?........................................... |
33 |
Respect the cycle: ISM as a guidepost for rotations.................................... |
33 |
Margins will diverge: where are the relative opportunities?........................ |
34 |
Dividend growth to rise: look for high prior DPS growth, low payouts ....... |
36 |
Trade risks remain: account for potential impacts ...................................... |
36 |
Momentum persists: look for sustainable growth....................................... |
37 |
Quality and FCF: should perform through cycle.......................................... |
38 |
C-Speak proprietary signal: where has corporate sentiment shifted?.......... |
38 |
Stock Baskets: Laggards, Leaders, Losing Momentum, Dividend Upside..... |
39 |
The authors would like to thank Sauvik De and Mohit Jain, our research support service professionals, for assisting in the preparation of this research report.
Keith Parker
Strategist keith-j.parker@ubs.com +1-212-713 3296
Neal Burk
Associate Strategist neal.burk@ubs.com +1-212-713 4066
US Equity Strategy 13 November 2018 |
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