Buy these cheap, defensive stocks as long as recession fears keep mounting, UBS says

Published Tue, May 2 20231:00 PM EDT

As recession fears keep flaring up again on Wall Street, investors can find safety in cheap, dependable, defensive stocks, according to UBS. U.S. gross domestic product rose at a 1.1% annualized pace in the first quarter , according to the Commerce Department late last month. The weaker-than-expected expansion signaled to investors that rising inflation and the Federal Reserve's interest rate hikes are combining to slow the economy. Gross domestic product is a measure of a country's economic health, tracking the total value of all the goods and services produced and consumed. The UBS playbook advises investors to stick to defensive stocks rather than the types of cyclical companies stocks that have benefited from high inflation. Given recent softness in economic data, the bank says cyclical stocks have further downside ahead. "In prior bear markets around recessions, cyclicals have underperformed defensives by 22% from peak to trough," UBS' associate strategist Sean Simonds said in a note last week. "Since the peak in cyclicals relative to defensives performance at the beginning of February, cyclicals vs defensives are down ~18.5%, which would make the relative returns in line with 80th percentile of a hard landing, with ~4% left," Simonds added. To be sure, investors have worried that defensive stocks have grown too expensive. But UBS pointed to several defensive groups that remain cheap, including telecom and insurance. Given this backdrop, here are some of UBS' cheap defensive stocks. Pharmaceutical heavyweight Merck surfaced on UBS' screen. Not only are Merck shares higher by 5% this year, they're also underappreciated by investors, according to a recent note from Citigroup. Analyst Andrew Baum upgraded Merck to buy from neutral , saying the New Jersey-based pharma has a robust oncology and hematology drug pipeline. Exchange operator Cboe Global Markets was another name that UBS identified. In March, Credit Suisse named Cboe its top exchange sector pick , saying it's a defensive addition to any portfolio in an uncertain economy. Cboe shares are up10% this year. Activision Blizzard also showed up on UBS the list. While UK regulators recently blocked Microsoft's attempt to acquire the video game company, Activision Blizzard remains the "strongest U.S. gaming publisher fundamentally," according to an April note from Barclays. The stock is down less than 1% this year. UBS also found Exxon Mobil and AT & T on its defensive screen.