Shift stocks from IT to consumer staples and healthcare – UBS

Eurozone still cheap

 

In its latest Investor’s Guide published in October 20, 2006, Swiss giant UBS recommends for its US strategy a shift away from over-valued information technology (IT) stocks towards consumer staples and health care.

“We have upgraded US Consumer Staples from a “moderate overweight” to “overweight”,” says the report, while reporting that it has also shifted IT from neutral to underweight.

Although UBS notes that the Consumer Staples sector has suffered from rising raw material costs, recent results have shown that margins have risen thanks to new products and the ability to raise prices.

UBS believes that the consensus expectations for earnings in the Consumer Staples market in 2007 are “reasonable, lowering the risk of disappointments”.

By contrast, its assessment of IT forecasts, after a build-up of inventories in the sector, is that “we do not believe companies will be able to meet these high expectations.”

Valuations are considered to have become “even more expensive”.

Valuations in the US Health Care sector are still seen as attractive despite a good performance year-to-date. New Medicaid subscribers and new products are expected to offset the underlying issue of patent expiries.

 

Still overweight US, but may see correction

 

UBS is still overweight the US, but adds some caution, noting that the implied volatility is at one of its lowest points of the year.

“Quite often this is a harbinger of a correction, as it shows the investors have temporarily become too comfortable with assets that are, after all, risky”, says UBS.  UBS advises waiting for tactical entry points.

As for specific stocks, Exelon utilities companies is on “Buy/Outperform”, as it is expected to benefit from increases in power prices, while Microsoft is also on “Buy/Outperform”, since there may be a buying opportunity if prices dip ahead of the launch of the new Vista operating system and MS Office.

Earnings per share (EPS) growth in 2006 is forecast at 13.10 for the US, compared with 7.55 for the World.

 

European climate “highly favourable”

 

UBS is also highly upbeat about Europe. “Positive earnings trends mean that valuations are still fair or even on the cheap side,” says UBS, adding that the economic climate in Europe is “highly favourable in spite of the disappointing  ZEW indicator in Germany”.

French industrials group Vinci has been added to the “Buy/Outperform” list of 18 recommended stocks, which includes 7 financial companies, 3 industrials and 2 consumer staples (one of which is Carrefour).

In the industrials sector Saint Gobain construction materials supplier gets a special mention, since it “could profit from an upturn in the German construction sector”.

Siemens has been taken off the recommendation list, with UBS saying that Vinci is a better alternative for a more defensive portfolio. 

EPS growth in 2006 is forecast at 12.25 for EMU compared with only 8.42 for the UK.

 

Modest expectations for Tokyo

 

UBS only expects “modest” earnings growth in Tokyo this year and appears unhappy about high valuations.

EPS is forecast at only 6.69, compared with 12.65 for Asia ex Japan.