UBS says disinflation is on the way — and shares 8 global stocks to play it

Published Sun, Nov 13 20228:07 PM ESTUpdated Mon, Nov 14 20221:22 AM EST

After a year of double-digit inflation in many countries, UBS is now forecasting "sharp" disinflation in 2023. The Swiss investment bank says weak growth alongside "mechanical" indicators, such as easing supply chain bottlenecks and rising goods inventories, will reduce the inflation rate next year — also known as disinflation. The U.S. consumer price index data on Thursday showed the annualized rate of inflation in the United States fell to 7.7% in October , down from 8.2% in September. "Our baseline is one where growth is weak and inflation declines rapidly," the bank said in its Global Economics & Markets Outlook for 2023 on Nov. 7. "A lot of the disinflation is mechanical and will be down to luck (food+energy), but we believe most pipeline indicators now suggest the U.S. and others are clearly shifting into a more disinflationary environment." The bank screened for stocks it expects to be positively impacted in such an environment. The table below shows two stocks across four regions that UBS says will benefit the most from disinflation. The bank recommends being overweight health care, communication services and information technology, while being underweight energy, industrials and financials in a disinflationary environment. British healthcare companies Genus and Hikma Pharmaceuticals ranked highly among the stocks UBS says will benefit from disinflation in the United Kingdom. Median analyst price targets give the stocks potential upside of 29.7% and 38.5% respectively, according to FactSet. UBS' screen also indicated that Danish health equipment maker Ambu and Belgian supermarket retailer Colruyt will be the most positively impacted by disinflation in the European Union. Chinese stocks such as food ingredients maker Yihai International and education services provider New Oriental stood out in the Asia Pacific region, while American bond trading platform MarketAxess and household products maker Clorox ranked highly among the North American stocks UBS expects to benefit from disinflation. The Swiss bank admitted that if its forecasts are wrong on inflation, however, the downside would be significant. "The negative payoff from getting our disinflation call wrong is large," strategists led by Arend Kapteyn warned. They said the "sweetest spot" for markets, historically, was when core inflation hit an annualized rate of 1.8% — a level the bank expects in 2024. "If we're wrong," the analysts said about their forecast, "the valuation adjustment needed would see the S & P 500 at 2,550." "Few places to hide then, but dollar assets, particularly the U.S. Value trade, should do least worst." The S & P 500 closed at 3,992.93 on Friday.