Saturday, March 29, 2008

"Ready for a rally" - UBS Investment Research

"Sectors under the most pressure also rebound the most": UBSJOINING A small but growing chorus of bulls, UBS issued a report yesterday (Mar 19) saying “there is reason for optimism in global equity markets.”It noted that US monetary and fiscal policy response has been aggressive and more is likely on the way. ”Coupled with attractive valuations, low interest rates, and reasonable earnings growth, we believe prospects for a more sustainable rally in equities appear good.” UBS has an overweight rating on the US, neutral on Global Emerging Markets and Japan, and underweight on Europe and UK.Referring to the all the angst currently, UBS said there is a silver lining. While fundamental pressures on the US economy stemming from the decline in house prices persist, the policy reaction to financial market turmoil has become increasingly aggressive, particularly from the Federal Reserve.The uncertainty that has depressed overall equity market valuations is likely to dissipate, leading to a more sustainable rally than has appeared probable in recent months. “Thus, we are getting ready for a shift in markets to a more positive assessment of near term prospects based on the policy response we’ve seen so far and what may yet be coming.”In deciding how to position oneself for the rally, UBS noted that the historical pattern of a market rebound suggests that the sectors that have been under the most pressure also rebound the most. “Therefore, we have lifted our allocation to Financials and Consumer Discretionary.”Looking back over previous market sell-offs (-10% from 12-month peak) that were followed by a sharp rebound (greater than 10% in three months), UBS found that the sectors that led markets lower also tend to lead in the recovery.“This is an intuitive result insofar as a rebound in markets is probably driven by a change in fundamental expectations that allows the most impaired sectors to recover, while short-covering in bombed out sectors also reverses course.”UBS added: “We believe that markets are poised for a broad recovery in valuations driven by a decline in risk premiums. These moves are likely to benefit the whole market.”

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