UBS Favors Financial, Consumer and Gold Names in Light of Market Fears

With resources and cyclical stocks having led the TSX down into correction land on fears that the credit crunch will slow the global economy, UBS strategist George Vasic is seeing similarities to the global deflation fears that hit markets nine years ago.

In August 1998, markets plunged 6% on the 27th and another 4% on the 31st.

But while resources and cyclicals led the decline back then as well, with the exception of gold, they did not lead the initial rebound that continued to the end of 1998, he told clients in a note.

Mr. Vasic attributes this to fears of soft growth, despite three interest rate cuts from the U.S. Federal Reserve that helped avoid a more significant slowdown.

But problems with the U.S. subprime mortgage market are not going anywhere, even if the Fed cuts. So even if the worse is over, investors are unlikely to get comfortable anytime soon, Mr. Vasic said.

As a result, he continues to favor financial and consumer names with dividend growth both in the long and short term, and thinks they will lead the initial part of the recovery.

For those willing to take on a little more risk, he like gold stocks given expectations for the U.S. dollar to fall as confidence is restored.