A profit surge in 2021 will see these stocks fly higher, UBS says

Published Thu, Feb 18 20219:31 AM ESTUpdated Thu, Feb 18 20212:56 PM EST

2021 will be all about earnings growth, according to strategists from UBS, who picked a selection of European stocks that they predict will deliver "rising profitability" in the coming year. "Last year, market returns were driven by the over 50% rise in price to earnings (P/E) multiples. This year we expect multiples to play little part in returns and instead focus on the powerful earnings recovery," UBS' Head of European Equity Strategy Nick Nelson, and UBS strategist Joao Toniato, said in a recent research report. Commodities, financials and "deep cyclicals" — sectors which benefit from economic growth such as homebuilding, mining and autos — were the sectors set to drive the 2021 earnings recovery, the strategists said. "The top 5 sectors (energy, autos, cap goods, banks and mining) are set to provide just under two-thirds of total market earnings growth," Nelson and Toniato predicted in the note. The UBS strategists listed the European stocks that they had screened for "rising profitability" and the ones most likely to benefit from the economic recovery in Europe as coronavirus lockdowns ease. Stock names included on the list ranged from Swedish-Swiss digital technology company ABB , French manufacturing firm Saint Gobain , luxury goods holding company Richemont and ad giant WPP . Other stocks with a "buy" rating were British retailer Sainsburys , telecoms group Vodafone , mining firm Lundin Mining , chemicals firm Linde , semiconductor manufacturing company Infineon , frozen foods company Nomad Foods and property developer Barratt Developments . They predicted these firms were geared to higher profitability with stronger earnings per share (EPS) growth than their peers — which is an important metric used by traders to gauge the value of a stock. They also predicted they would have a larger improvement in 2021 profit margins than peers. "It feels to us that the economy is turning," Nelson told CNBC on Thursday. "We're just at that inflection point where we're starting to see a recovery from what has been, in the U.K. for example, the worst recession for 300 years and that's normally the point where we start to see positive surprises on earnings, just as we saw negative surprises through the downturn last year." "What we tend to see is that in year one of any profit recovery, companies do very, very well because, if you think about it, last year (there was) disastrous economic growth, very poor top line (growth), people in lockdowns not able to buy products or buy services, so companies cut costs ... and then you have a reduced cost base," he said. "And then of course when you start to get your top line growth growing, then you get this very strong operating leverage, i.e. you have very strong top line growth without much cost growth and that's really what we're seeing in terms of beats, the beats are coming on earnings."

A man wearing a Union Jack flag design face mask shops in a Sainsburys supermarket on January 12, 2021 in Tunbridge Wells, United Kingdom.

Chris J Ratcliffe | Getty Images News | Getty Images

2021 will be all about earnings growth, according to strategists from UBS, who picked a selection of European stocks that they predict will deliver "rising profitability" in the coming year.

"Last year, market returns were driven by the over 50% rise in price to earnings (P/E) multiples. This year we expect multiples to play little part in returns and instead focus on the powerful earnings recovery," UBS' Head of European Equity Strategy Nick Nelson, and UBS strategist Joao Toniato, said in a recent research report.

Commodities, financials and "deep cyclicals" — sectors which benefit from economic growth such as homebuilding, mining and autos — were the sectors set to drive the 2021 earnings recovery, the strategists said.

"The top 5 sectors (energy, autos, cap goods, banks and mining) are set to provide just under two-thirds of total market earnings growth," Nelson and Toniato predicted in the note.

The UBS strategists listed the European stocks that they had screened for "rising profitability" and the ones most likely to benefit from the economic recovery in Europe as coronavirus lockdowns ease.