UBS expects the Fed to halve interest rates next year. Here are 3 preferred trades
UBS has highlighted several stock ideas it favors for 2024, as it forecasts massive cuts to interest rates next year. The investment bank expects the U.S. will see slower economic growth and strong disinflation leading to an interest rate cut of 275 basis points . That would bring the Federal Funds Rate down from the current range of 5.25% and 5.5% to between 2.50% and 2.75%. “We expect the rate hiking cycle is over, despite remaining risks of more rate hikes,” UBS economists led by Jonathan Pingle said in a note to clients on Nov. 13. The economists expect rate cuts to start in March, when the Federal Reserve’s board meets, saying, “However, as the slowdown in the economy and the extra disinflationary leg begin in earnest, we expect the Fed in the second half of the year to turn to full-on accommodation, with more rate reductions, in line with what it has done historically.” Given the economic outlook, UBS strategists recommend a number of trades to clients for 2024. CNBC Pro has highlighted three of them below: Equal-weighted S & P 500 versus the Stoxx Europe 600 UBS expects U.S. profit margins to recover, as interest rates decline, supporting earnings growth for U.S. companies. Investors can gain exposure to the equal-weighted S & P 500 index through the Invesco , iShares or Xtrackers ETFs. “As interest rates decline, and more so in the US, we expect that US margins may find support and potentially recover if growth is resilient, while European margins should decline,” said UBS strategists Gerry Fowler and Sean Simonds in a separate note to clients on Monday. UK equities versus Italy The U.K.’s FTSE 100 tends to outperform during volatility, thanks to its large exposures to pharmaceuticals, consumer staples, utilities and insurance sectors, according to UBS. The bank also found that Italy’s stocks exposed to banks and cyclicals appear overextended, facing risks from slower growth, rising rates and potential EU budget conflicts. “The FTSE also looks abnormally cheap on sector adjusted P/E (relative to global equities). All the sectors apart from software trade on bigger discounts than normal against their US peers,” the UBS strategists said. China Tech equities The relative valuation of the MSCI China index, compared to the MSCI World index, is close to an all-time low, according to UBS. This means that the investment bank expects equities to rebound in the near future. While analysts have downgraded assets in the broader index tracking Chinese stocks, UBS strategists noted that China’s Internet Technology companies have seen earnings upgrades on the back of lower subsidies and cost cuts. To reflect that view, UBS strategists said they favored gaining exposure to the KraneShares CSI China Internet ETF in 2024. “We believe the best way to express this improving [return on equity] and bottoming out in China macro data is via long KWEB calls; KWEB has 72% of constituents in China internet and is trading close to its historical trough valuation,” they said.
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