UBS is the latest of the big brokers to update its equity strategy and model portfolio recommendations.
It remains overweight in the mining and energy sectors as it believes China will continue to see cyclical improvement in growth momentum, although not at the levels previously seen. Regarding the energy sector, UBS is attracted to it on valuation grounds and the view that the oil price has room for a degree of cyclical upside.
Rio Tinto continues to be the broker’s preferred mining stock on valuation grounds and its underlying quality, with upside potential due to UBS’ belief that iron ore prices will edge higher on a three to six month timeframe.
It has removed gold-giant Newcrest Mining on near-term production issues and recently added Arrium on attractive valuation grounds and its near-term view of iron ore.
In the energy space, Oil Search and Woodside Petroleum remain its key stocks, although it's also holding Origin Energy on a compelling valuation basis.
"We are moderately underweight banks based on our view of the sector’s limited capacity for further re-rating given a sluggish credit growth backdrop and relatively slim bad and doubtful debt provisions. We are also underweight REITs due to relatively full valuations and the improving cyclical outlook for the global economy, which should favour cyclicals,” UBS noted.
Elsewhere, the broker remains overweight non-financial industrials where it can see a path to earnings growth at reasonable prices. UBS is underweight what it sees as expensive defensives and tilting towards value plays.
Based on these thematic views, the broker has added Aristocrat Leisure, Boral and JB Hi-Fi whilst removing NRW Holdings, Transpacific Industries, QBE Insurance Group and Orica.
MARKETS SPECTATOR: Energy attraction
UBS remains bullish on mining and energy as it forecasts a bounce in iron ore prices in the next three to six months.
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