UBS says some sectors are about to surge and names the 'key opportunities' in global stocks

Published Thu, May 13 202110:14 PM EDT

Lucy Handley @in/lucy-handley-b2b0a61a/@lucyhandley

Investment bank UBS has picked a raft of global stocks that have further to go, with one sector set to do particularly well. The bank's analysts said a number of automotive, energy and construction stocks could provide investors with a "key opportunity," in a research note published Friday. All of UBS' picks are so-called value stocks, which are thought to be trading below their fundamentals. They can be underappreciated by investors and are different to "growth" stocks, which are seen as having strong future earnings potential. Value stocks have outperformed growth stocks by almost 30% since November, the analysts noted, but remain less than halfway back to levels seen in January last year — potentially providing an investment opportunity. The analysts noted that there were challenges in identifying value opportunities, and said one trick could be to look at "cost of equity." It's a way that traders can assess whether to invest in a stock and is, in effect, their assessment of potential rewards based on the risk taken. UBS used its own cost of equity (COE) formula to forecast a stock or sector's potential upside. It linked the estimated cost of owning the stock — or risk — with future returns and longer-term growth expectations. "We remain of the view that mobility hit Value stocks such as Energy, Construction, Autos are (a) key opportunity in this rotation, those are among the sectors identified by the UBS CoE framework as having large upside potential," the analysts wrote. Auto stocks The sector has a potential upside of over 100% implied by cost of equity, UBS said, and is one of the bank's "key recommendations" in value stocks. "It is expected to deliver the strongest operating leverage in this recovery and could benefit from the consumer savings accumulated during lockdowns," the bank's analysts wrote. A high operating leverage means a company has low variable costs and high margins. Stellantis is the bank's top auto pick, followed by parts supplier Faurecia and German firm Volkswagen . Energy stocks The sector "performed strongly from November to January," UBS said, but hasn't done as well as other value stocks, and now has a potential upside of more than 70% implied by cost of equity. Its picks include Spanish firm Repsol , Austrian company OMV and Anglo-Dutch firm Shell . Construction materials stocks The sector is set to benefit from the fiscal stimulus put in place by governments during the coronavirus pandemic and is a "high conviction" industry, according to UBS. Its picks include British housebuilders Vistry , Redrow and Taylor Wimpey . These stocks have a potential upside of at least 85% implied by the cost of equity, UBS said. When it comes to value investing, the bank said: "We still believe Value to be a trade rather than a long-term investment. However, a strong EPS (earnings-per-share) recovery, fiscal stimulus, consumer savings and higher inflation & yields mean the window of opportunity for Value is still open in our view."

Worker standing in front of oil plant

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Investment bank UBS has picked a raft of global stocks that have further to go, with one sector set to do particularly well.

The bank's analysts said a number of automotive, energy and construction stocks could provide investors with a "key opportunity," in a research note published Friday.

All of UBS' picks are so-called value stocks, which are thought to be trading below their fundamentals. They can be underappreciated by investors and are different to "growth" stocks, which are seen as having strong future earnings potential.

Value stocks have outperformed growth stocks by almost 30% since November, the analysts noted, but remain less than halfway back to levels seen in January last year — potentially providing an investment opportunity.