UBS goes cyclical for 2022: Sector Watch

Jan. 02, 2022 5:46 PM ETSPDR S&P 500 Trust ETF (SPY)SP500, XLY, XLE, XLF, XLV, XLP, XLU, XLK, XLC, XLI, XLB, XLREBy: Kim Khan, SA News Editor12 Comments

Facade and logo of UBS bank office

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  • Solid growth, strong household finances and rising business spending should boost stocks next year, UBS says.
  • David Lefkowitz, CIO Americas at UBS Wealth Management is looking for the S&P 500 (SP500) (NYSEARCA:SPY) to hit 5,000 in June and 5,100 in December.
  • Cyclicals should outperform, but it may make sense to scale back cyclical exposure in the second half of the year as growth moderates, Lefkowitz says in a note.
  • Risks to the outlook are a worsening of the pandemic, more disruptive supply chain bottlenecks, faster and sooner Fed tightening and a sharper-than-expected slowdown after the boom.
  • With the cyclical bias, UBS ranks Most Preferred:
  1. Consumer Discretionary (NYSEARCA:XLY) "The sector should benefit from economic recovery, lower mortgage rates, and secular trends in e-commerce."
  2. Energy (NYSEARCA:XLE) "Relative to oil prices, the sector looks cheap. Free cash flow yields are very attractive, capital discipline has improved, and the sector should benefit as demand recovers."
  3. Financials (NYSEARCA:XLF) "Earnings should recover as economic growth rebounds and interest rates move gradually higher."
  4. Healthcare (NYSEARCA:XLV) "Most risks around drug pricing reform are likely already reflected in share prices. Earnings are growing faster than defensive peers."
  • Its Least Preferred sectors are:
  1. Consumer Staples (NYSEARCA:XLP) "The sector initially benefited from 'panic' buying, but it could underperform as economies reopen."
  2. Utilities (NYSEARCA:XLU) "The sector will likely lag as investors look toward more cyclical opportunities in the market."
  • UBS is Neutral on two megacap sectors: Info Tech (NYSEARCA:XLK), and Communication Services (NYSEARCA:XLC). It is also Neutral on Industrials (NYSEARCA:XLI), Materials (NYSEARCA:XLB) and Real Estate (NYSEARCA:XLRE).
  • See MKM's 2022 picks in eight subsectors.

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