UBS: Key Issues of Concern for Overseas Institutions Currently

Recently, the global research team of UBS Group AG held client meetings in Europe and North America, summarizing several key focus issues that are widely concerned in the global market, reflecting the current investor sentiment and market expectations.

Overall, investors are generally bullish on the stock market, with the most optimism towards the US market regionally, and a stronger preference for the semiconductor and manufacturing industries. Some young investors believe that despite potential risk signals from tech stocks, the development of AI will drive productivity improvements and stabilize corporate profits.

UBS Group AG also pointed out that in terms of the overall economic environment, "no landing" may replace "hard landing" and "soft landing" as the consensus, with commercial risks potentially becoming the primary investment risk.

Investors are generally bullish

The analysis team at UBS Group AG pointed out that investors are currently generally bullish on the stock market, with the following main reasons:

Global markets have repeatedly hit new highs this year, and such situations after the end of a bear market often indicate a continuation of new highs (report data shows an 88% likelihood of continued rise the following year, with an average increase of 10%);

Investors are currently discussing not "hard landing" or "soft landing," but "no landing," meaning the Fed's temporary pause and the overall volatility of the US stock market;

Corporate profits are expected to gradually recover;

Some investors also believe that generative AI will help improve productivity. Among them, young investors under 40 are generally optimistic that the development of AI technology will boost the stock market.

Productivity growth rate is a key issue

UBS Group AG believes that the most critical economic issue is whether, with the support of AI, US productivity can accelerate to a level of 2.5% or remain stable on a growth trajectory of 1.5%.

However, this issue has not received widespread attention from investors, with only a quarter of respondents expressing interest in this topic. Some users believe that the acceleration of productivity will far exceed 1%. Other investors think that deglobalization, increased tariffs, and decarbonization will lead to a decline in productivity.

UBS Group AG pointed out that if US productivity can accelerate to 2.5% within 3 years, the Equity Risk Premium (ERP) will increase from 4% to 5.1%, providing a 17% upside potential in the market.

More importantly, the report analyzed that the improvement in productivity largely depends on market confidence. During the information and communication technology revolution, the long-term moving average of productivity has increased from 1.5% to 3.5%.

"No Landing" Becomes Consensus

More and more viewpoints believe that the economy will neither have a "hard landing" nor a "soft landing," but rather a "no landing" scenario - meaning the economy will remain strong for a longer period, with the Fed postponing the timing of interest rate cuts. UBS Group AG pointed out that there are many factors supporting an optimistic economic growth outlook.

In the middle of the fourth quarter earnings season, the number of companies mentioning "economic recession" has almost returned to the pre-pandemic level.

UBS Group AG believes that positive wealth effects, rising real wages, gradually easing fiscal policies, and the Fed's potential rate cut are all factors that will help boost GDP growth.

Moreover, the market's implied interest rate expectation for the one-year period has been adjusted to 3.8%, and the one-year inflation expectation has been raised from 2% seven weeks ago to 3.9%, which may also be a sign of the economy hitting bottom and rebounding.

However, UBS Group AG also warns that investors seem to be overly focused on fiscal policies and positive wealth effects.

Business Risks Begin to Emerge

Due to the increasing market concentration, business risks are becoming a more prominent investment risk.

The report points out that this year, the stock prices of three European companies (LVMH, ASML, SAP) and five American companies (Nvidia, Meta, Microsoft, Amazon, Eli Lilly) have risen by 50% and 64% respectively, showing a significant overbought momentum.

UBS Group AG warns that if we refer to the "bubble economy" in Japan and the 2000 dot-com bubble, the current "narrow" uptrend may last longer and be narrower.

Most UBS Group AG clients believe that, compared to the 2000 dot-com bubble, the current situation is equivalent to the 1997-1998 stage.

Danger Signals in Tech Stocks

Almost all UBS Group AG clients believe that, similar to the 2000 dot-com bubble period, the structural long position is in the equipment manufacturing end rather than the application end.

Therefore, over 80% of clients are bullish on the semiconductor industry, with the majority of them over-allocated in stocks of ASML, TSMC, or Nvidia, expecting 2024 to be a key year for the commercialization or speculation of artificial intelligence business models.

UBS Group AG believes that the potential risks in tech stocks may come from the following signals: Disconnect between Profit Momentum. Investors may focus too much on future profits rather than current profits, especially in the semiconductor sector.

Market valuation is too high, and the valuation as a percentage of GDP is "unrealistic."

It is worth noting that the above risks are more likely to occur within the semiconductor sector.

PMI Index is Losing its Significance

UBS Group AG believes that as the decoupling between PMI and nominal GDP growth becomes more significant, PMI no longer has signaling significance.

The report points out that cyclical industries are increasingly being driven by structural stories (such as electrification, automation), while many defensive industries (such as consumer goods, medical equipment, pharmaceuticals excluding GLP1) are facing structural challenges.

Investors are Bullish on the US Market Consistently

UBS Group AG clients are unanimously bullish on the US market. UBS Group AG believes that it is necessary to remind that the US market is a "defensive" market, if the new order index of global PMI rises by more than 2% within 6 months, the performance of the US market tends to be unsatisfactory, as its operating leverage is the lowest among all major markets globally.

How to Invest in Industry Trends?

UBS Group AG and investors alike believe that the recovery of the manufacturing industry is now stronger than the service industry, so how should one invest in this trend?

UBS Group AG believes that profits should be gained through investing in the "Copper Doctor" because the price of copper often serves as a leading indicator for three major investment themes: manufacturing, investment-intensive industries, and electrification metals.

In addition, few investors pay attention to industries such as telecommunications, beverages, utilities, and energy, or even industries benefiting from electrification such as transmission and distribution. However, UBS Group AG believes that these industries may also be "interesting" investment opportunities.