UBS is calling for historically weak global growth in 2023 as recession risk rises. Inflation will fall faster than expected as the economy weakens, according to the firm. Here are 33 stocks that will thrive the most in a lower inflation environment. Both the economy and inflation are set to fall off a cliff, according to the top strategists at UBS.
The global economy looks “historically weak” right now and will grow just 2.1% in 2023, UBS economists and strategists led by Arend Kapteyn wrote in a November 7 note. That would be the lowest rate of year-over-year growth since 1993, excluding the pandemic and the financial crisis, Kapteyn noted.
UBS expects 13 of 32 major economies to contract for at last two quarters by the end of 2023. The US won’t be immune from this widespread weakness, and will suffer from near-zero growth in each of the next two years, which is below consensus estimates, Kapteyn wrote.
Inflation, which is finally starting to fall as the global economy softens, will drastically decline from here, according to UBS. The firm’s strategists see inflation settling at an average of 3.6% in 2023 and just 1.9% in 2024, down from 7.7% in October, according to the latest CPI report.
Few are as optimistic about inflation as UBS. In fact, consumers only see inflation sliding to 5.1% in the next year, according to a University of Michigan survey published on November 11.
Lower inflation will be a relief for many companies, but it will especially benefit those stocks in three sectors, according to UBS: communication services, healthcare, and information technology.
Communication services and healthcare stocks have outperformed when inflation declines and have shown the least sensitivity to changes in price growth, Kapteyn wrote. Meanwhile, sales for tech and healthcare names have the lowest positive correlation to changes in inflation. Conversely, energy names perform worst when inflation falls since the sector is reliant on oil rising.
33 stocks that will benefit from lower inflationIn light of these predictions, UBS created a quantitative screen to determine which stocks would fare best as inflation drops.
The firm examined three attributes: the correlation of stock returns with inflation after adjusting for growth, financial conditions, and liquidity; the correlation of 12-month forward sales growth with inflation; and average monthly performance relative to the six-month trend as inflation falls. Each stock got a score in each category of 0 to 1 as well as a composite score.
After examining the companies individually, UBS ran several optimizations at both the stock and sector levels to maximize the score of the portfolio as a whole. That helps ensure that the stocks would provide strong risk-adjusted returns if bought together instead of just separately.
Below are the 33 US-based stocks that had the highest scores in the UBS analysis of which companies will perform best if and when inflation declines. Along with each is its ticker, sector, score in each category outlined above, and its composite score.