Investing.com — UBS strategists, led by Andrew Garthwaite, have indicated that a 5% yield on the US 10-year Treasury would mark a negative turning point for equities.
They also suggest a 35% chance of a stocks bubble, which could happen when bubble areas in the global market reach at least 30% of the global market cap. This would be accompanied by a price-to-earnings (P/E) ratio of at least 45x and a bond yield of no less than 5.5%.
The team noted that the ‘Mag 6’ tech stocks, which include Amazon (NASDAQ:AMZN), Apple (NASDAQ:AAPL), Alphabet (NASDAQ:GOOGL), Nvidia (NASDAQ:NVDA), Meta (NASDAQ:META) and Microsoft (NASDAQ:MSFT), currently have a P/E ratio of 34x. UBS also highlighted that the best-performing region when Treasury Inflation-Protected Securities (TIPS) yields are rising has historically been Japan, in terms of local currency.
Conversely, the worst-performing region in dollar terms has been the Global Emerging Markets (GEM), with the US typically underperforming in such scenarios.
UBS strategists expect bond yields in the US to decrease to 4.25% by the end of the year. As a result, they recommend staying underweight on non-financial cyclicals, which correlate 62% of the time and are priced in with very high Purchasing Managers’ Index (PMI) values. These stocks also trade on near-record P/E and price-to-sales (P/S) relative to defensives, against a backdrop of deteriorating relative earnings revisions.
The strategists prefer defensives with low financial leverage, such as SAP, Microsoft, BAE Systems (LON:BAES), Tesco (OTC:TSCDY), Leonardo, Abbott and DSM. They also recommend buying UK bond/rate-sensitive risk, such as utilities and real estate, which they see as very cheap, oversold and the most sensitive sector. This is due to their belief that UK yields across the curve are too high and should recede.
UBS cited stocks including SSE (LON:SSE), National Grid (LON:NG), Persimmon (LON:PSN), Land Securities (LON:LAND) and UK homebuilders in general, which are discounting a 5% fall in house prices. As of Thursday, the 10-year Treasury yield was at 4.62%, showing little change on the day.
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