Monthly pointing the way to our favorite equity recommendations UBS Equity Compass Chief Investment Office WM — December 2017 The year ahead – cautious optimism Global equities Eurozone UK Stay overweight Stay overweight Stay underweight a b click on Contents the article Editorial UBS Equity Compass The year ahead – cautious optimism ...........................................................3 This report has been prepared by Region Strategy UBS AG, UBS Securities Japan Co., Ltd., Stay overweight equities .............................................................................4 and UBS Switzerland AG. Please see the important disclaimer at the end of the Sector Strategy document. A pro-cyclical tilt .........................................................................................5 Regions Editor-in-Chief Switzerland .................................................................................................6 Bert Jansen, Equity Strategist Eurozone ....................................................................................................7 United Kingdom .........................................................................................8 Editors United States ..............................................................................................9 CLS Communication AG, Basel Japan ........................................................................................................10 Asia ex Japan ............................................................................................11 Editorial deadline Global Emerging Markets..........................................................................12 15 December 2017 Sectors Project Management European Automobiles ..............................................................................13 Virender Negi* European Consumer Discretionary ............................................................14 European Consumer Staples .....................................................................15 Desktop Publishing European Energy .......................................................................................16 CIO Digital & Print Publishing European Financials ..................................................................................17 European Healthcare .................................................................................19 Translation European Industrials ..................................................................................20 CLS Communication AG, Basel Information Technology ............................................................................21 European Materials ...................................................................................22 Cover picture Real Estate ................................................................................................23 iStock European Telecoms ...................................................................................24 European Utilities ......................................................................................25 Languages Published in English and German Sustainable investing ............................................................................26 Contact Equity Radar ...........................................................................................27 [email protected] UBS homepage: www.ubs.com Investment themes Diversified dividends in the UK ..................................................................28 EM(U) winners ..........................................................................................28 Eurozone dividend growth ........................................................................28 Eurozone in style: Value opportunities ......................................................28 Finding value in EM ..................................................................................29 Gender diversity matters ...........................................................................29 Riding the wave of Internet of Things (IoT) ................................................29 Sustainable value creation in emerging markets ........................................29 Swiss high-quality dividends ......................................................................30 US energy stocks: Time to refuel ...............................................................30 US Smart Beta ...........................................................................................30 US technology: Secular growth, on sale ....................................................30 *We would like to thank Virender Negi, an employee of Cognizant Group, for his assistance in preparing this report. Subscribe Cognizant staff provide support services As a UBS client, you can subscribe to the UBS Equity Compass via the e-banking to UBS. platform, via Quotes or by asking your client advisor. UBS CIO WM December 2017 2 Editorial The year ahead – cautious optimism I have over 20 years of experience as L • We expect another year of positive equity returns, driven mainly by an equity strategist. After two long a rising corporate profits, rather than higher valuations. stays in London and Paris, and a short • The prospect of monetary tightening – central banks’ net asset stint in Singapore in between, I joined DITORI purchases will turn negative by the end of the year for the first UBS in Zurich in 2014 as European E time in nearly a decade – leaves limited scope for P/E expansion, in equity strategist. I have a Master’s our view. degree in economics from the Univer- sity of Amsterdam, and an MBA from • While we are cautiously optimistic about the year ahead, potential the University of Washington. surprises could ambush the market. ATEGY Bert Jansen, strategist R ON ST The world economy should grow by a solid 3.8% next year, similar to I this year. With inflation likely to remain stable, a goldilocks scenario for REG equities looks probable. Nevertheless, the year will not be an easy one for investors. Instead of dwelling on our base scenario for the year ahead, best summarized as From the editor’s desk: ATEGY “cautious optimism” (please refer to “Year Ahead 2018,” published on • The next issue of UBS Equity Compass will be pub- R 29 November), I’ll highlight three potential surprises that may upset the lished on 22 January 2018. ST R applecart (none of which constitutes the CIO WM House View). European sovereign bond yields, instead of rising as is widely expected, SECTO could fall. Such a scenario is conceivable because inflation expectations will stay low due to structurally deflationary pressures from an aging S ON society, disruptive technologies and high debt. It would hurt financials I and support long-duration sectors like consumer staples, healthcare and REG information technology. A second surprise would be another year of earnings-per-share (EPS) RS upgrades. The positive impact from better-than-expected economic growth would likely offset any effect from adverse currency movements. SECTO In Europe, earnings have surprised positively in two consecutive years only twice in the past 30 years. NG I T Finally, equities might fall markedly early in the year, triggered by the US S NVE Federal Reserve tightening policy more aggressively than anticipated and I confounding the conventional view that market gains will be front- loaded. Equity markets would then struggle to regain the lost ground NABLE because no proverbial wall of worry would be left to climb: all the eco- I TA nomic, political, regulatory and fiscal lights would be flashing green. A S market priced for perfection amid rising US interest rates implies no SU upside. R a In our global tactical asset allocation, we are overweight equities against D high grade bonds and euro high yield credit. We are also overweight the Eurozone versus an underweight in UK equities. At a global sector level, y Ra we are overweight energy, financials and information technology. UIT Eq Happy holidays and best of luck in the year ahead. EMES h T T n ESTME Bert Jansen, Equity Strategist UBS Chief Investment Office WM Inv Back to Contents page UBS CIO WM December 2017 3 Region Strategy Stay overweight equities I have more than 12 years of experi- L • We are positive on global equity markets as we enter 2018, amid ence as an equity strategist, and a robust economic growth and limited evidence of an impending joined UBS in 2008. I hold a PhD in recession. Much like in 2017, solid earnings growth should con- economics from the University of DITORI tinue to support equity markets. Global equities are valued in line Bonn, and am also a CFA charter- E with their 30-year averages. holder. • We maintain our overweight position on Eurozone equities. Lead- Markus Irngartinger, ing domestic economic indicators remain at high levels and are CFA, strategist supporting domestically generated earnings growth. Eurozone ATEGY companies are disproportionately geared toward the robust global R manufacturing cycle. ON ST • We remain underweight UK stocks. We expect earnings growth to I decelerate in 2018. Political uncertainty is likely to weigh on invest- REG ment activity. Equity markets – preferences and performance Global equities have pursued an almost uninterrupted upward path with Market returns in % ATEGY relatively low variation in 2017. The resurgence in economic growth R worldwide fueled a broad-based earnings recovery, which underpinned Regions/Countries Positioning 1-month yTD ST R the healthy advance of roughly 20% in the MSCI All Country World Australia