UBS’ ASX playbook for an Australian soft landing

Forget a recession or even stagflation - Australia is heading for a Goldilocks 2023. At least that’s the view of one Richard Schellbach, strategist for UBS Australia. He recently increased his year-end target for the ASX 200 to 7,500. While that’s only 1% higher than Wednesday’s closing levels, it’s still pretty punchy given the headwinds present in global markets. 

In this piece, we’ll take you through Schellbach’s thesis plus some of UBS’ new and best equity market ideas to back up this thesis.

The most anticipated recession may not come

The beginning of 2023 has seen a split in the economic outlook. On one hand, the global inflation picture is looking better on the surface but remains difficult to manage at the services level. Central banks are still hiking interest rates, and the debate over when they end those hikes is still ongoing. Layoffs are starting to impact major firms stateside. 

But on the other hand, China is reopening after three years of lockdowns and with it, investors have been noticing small changes in the regulatory environment. The Australian consumer remains strong despite recent data showing a spending slowdown. And the European economy may avert a deep recession if the ECB acts quickly enough.

It’s this second batch of reasons that makes Schellbach believe corporate earnings will not turn out as bad as other analysts say it will.

Hence, the hiked year-end target for the ASX 200.

But cyclicality is still a thing

Incidentally, just because the ASX’s year-end target was hiked does not mean that it’s time to go all-in on the index. Schellbach explains that this year will be another year for stock pickers - and especially so for a specific kind of stock picker:

“If a company has consistent revenue growth, lacks cyclicality, and has a competitive advantage, it should be able to continue growing its dividends per share through the cycle,” Schellbach wrote in his note.

So which sectors fit this criteria? Schellbach’s number crunching suggests Infrastructure, Utility and Financial stocks have been the most consistent in upping their annual dividend payments over the last 20 years.

Favourite sectors and stocks

With the above in mind, you should be totally unsurprised that the team has upgraded its outlook for infrastructure and utility stocks. Insurance companies also join the top buys list, on the basis that valuations are looking more favourable.

In contrast, mining stocks have been downgraded to NEUTRAL given the outperformance we saw in the ASX materials index (+29% in the last six months alone.)

At the stock-specific level, Suncorp (ASX: SUN) is the broker’s top insurance pick. In the materials space, South32 (ASX: S32) is now a buy while BHP (ASX: BHP) is a sell. And after its recent outperformance, Super Retail Group (ASX: SUL) was recently downgraded to neutral and removed from the broker’s best ideas list.  

The broker’s best ideas list also includes such names as Orica (ASX: ORI), Netwealth (ASX: NWL), and ANZ (which is also its top pick in the financials space).