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1、Global Research 13November 2018Equity StrategyEquity StrategyUS Equity StrategyKeith Parker Strategist +1-212-713 3296Neal Burk Associate Strategist +1-212-713 4066Keith Parker Strategist +1-212-713 3296Neal Burk Associate Strategist +1-212-713 4066De-rating and deceleration: how to invest for 201c
2、mericasAfter big de-ratings: 16% avg S&P returns,40% reversal of sector/IG returns The S&P 500 P/E has declined by over 2x in2018 as increased risks around higher rates, tariffs and slowing growth have been priced. In years following a P/E decline of 1x, S&P 500 returns have averaged 16% as the P/E
3、has recouped 30% of the decline. We have also found that 40% of sector and industry group (IG) relative returns have reversed in the year after de-rating. Therefore, we selectively position for a potential catch-up trade. The selloff in October was much bigger than the 5%+ type pullback we thought w
4、as likely (link), but we still see equities higher to year end. We target 3200 for the S&P for 2019 year end on 7% EPS growth and a rise in the P/E, in line with history after de-ratings. No further trade escalation, solid but slowing growth and moderately higher rates underpin our view.For decelera
5、tion: ISM cycle is a guidepost for market peak, leadership, rotations We analyze market, sector, IG and style returns since 1955 and 1984 for 4 phases of the ISM mfg cycle using 52.5 as the transition point: 1) low ISM below 52.5 butrising, 2) high/rising, 3) high/falling (current phase), and 4) low
6、/falling. S&P returns at this stage have been sizeable with a typical peak after the ISM falls below 50. The avg 14m length of this phase would point to a market peak after Oct-19, using Aug-18 as the ISM peak. Healthcare, Tech and Utilities have outperformed on avg when the ISM was high/falling, wi
7、th Materials, Autos and Semis the worst performers. At a style/factor level, momentum, quality, and growth should lead at this stage, but they are not cheap. Large caps outperform and value tends to lag but FCF does well. ISM prior cycle highs; 4) US investment/GDP is below avg; 5) margins are high
8、but productivity is not; 6) with no repatriation tax, dividends can jump; 7) financial conditions are supportive, cycles end when rates nominal GDP. We assess the balance of risks around each.Whats priced? De-rating of 2018 vs. key drivers for 2019To assess whether the de-ratings in 2018 are justifi
9、ed given fundamentals, we create 2019 composite scores for sectors, IGs, and styles based on key themes: 1) ISM cycle returns, 2) margin risk, 3) trade risk, 4) dividend upside, 5) momentum+growth, 6) corp sentiment, 7) quality+FCF. Relative de-ratings are 50% correlated to our composite scores, so
10、some relative risk/upside is priced. Sectors/IGswith a positive fundamental vs. value trade-off are: Healthcare, Pharma/Bio, Consumer Svcs, Retail, Comm Svcs, Media&Enter, Industrials, Cap Goods, Transports, Energy, Insurance. Those with the most negative trade-offs are Materials, Autos, REITs, Food
11、&Stap Retail, HH Products.How to invest for 2019? Sectors/IGs, styles/factors, baskets for key themesWe remain positive going into 2019 but try to control for the risks. We look for a relative catch-up and value amongst the cyclicals. We upgrade Energy tactically to o/w and pair with Materials (u/w)
12、 for a 10Obp higher div yield and oil cycle upside. We also pair Comm Svcs (o/w) and Industrials (o/w) over Tech (u/w) given similar revisions/ growth but a 20% relative de-rating. For defensives, we stay o/w Healthcare and u/w REITsand Utilities. We prefer quality, largesmall and would buy the dip
13、in momentum/ growth for this stage of the cycle. Lastly, we highlight 4 baskets to capitalize on the key themes: 1) Laggards with solid fundamentals to catch up, 2) Dividend growth upside, 3) High momentum+growth to lead, 4) Low momentum/ growth to lag.This report has been prepared by UBS Securities
14、 LLC. ANALYST CERTIFICATION AND REQUIRED DISCLOSURES BEGIN ON PAGE 44. UBS does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors sh
15、ould consider this report as only a single factor in making their investment decision.De-rating vs. key themes/drivers: whats priced?The key question in our mind going into 2019 is whether the de-rating in the market multiple and across most industries is justified, given the fundamental backdrop. W
16、e evaluate how sectors, industries, styles and factors stack up as it relates to the key themes discussed below, and compare those forward-looking drivers of performance against the 2018 returns and valuation changes.De-rating in 2018 could see a 40% reversal of relative returns in 2019. As we discu
17、ssed above, sectors/IGs have reversed 40% of relative underperformance in the year after a P/E de-rating. To assess the potential for a re-rating higher, we score sectors, industries and companies based on YTD performance, change in NTM P/E since March (aftertax priced out) and NTM P/E vs. average s
18、ince 2010; we calculate a cross-sectional z-score for each and take the average across the three.Composite scores for 2019 based on key themes and fundamental drivers. To better assess relative impacts of the key drivers for 2019, we standardize different data results by calculating a z-score for ea
19、ch of the themes across sectors and industries, as well as styles and factors for some of the themes. We discuss our approach for each of the themes starting on page 33. We take an average of the relative z-scores for the below to get a composite score for2019. ISM cycle implied relative returns, as
20、suming midpoint of 52.5 hit in Oct-19. Tariff-related potential impacts using UBS Evidence Lab mapping. Margin risk score amid decelerating sales growth and rising wages. Dividend growth upside amid rising payouts. Momentum tends to persist, look for sustainable growth. C-Speak: corporate net sentim
21、ent can provide a leadingsignal. Quality tends to outperform at this stage, look for FCF too.We include the historical context because some industries and stocks are trading close to historical lows on a relative basis.We position to capitalize on underappreciated later cycle upside and leadership/
22、momentum that we think is still relatively cheap while still accounting for the key risks as it relates to tariffs, decelerating growth, rising wages and margin sustainability.We see the 25x relative rerating between domestic/defensive sectors and more cyclical sectors as likely pricing in more risk
23、s.Cyclicals de-rated by much more in 2018. There has been a big relative rerating since March as P/Esfor Financials, Industrials, Materialsand Energy declined by 2x while P/Es increased by 1 x for Utilities, Health Care and Staples. Tech and Comm Svcs P/Es have been flat.Figure 14: S&P 500 sector an
24、d industry change in NTM P/E since MarchChange in N I M H/t since Maren bales revision, 3m (rhs)Source: FactSet, UBSWe would tilt toward those sectors and IGs that are above the dashed line, given the trade-off between relative valuation support and fundamentals: Healthcare, Pharma/Biotech -Consumer
25、 Services, Retail -Comm Svcs, Mediaft Enter -Industrials, Cap Goods, -Transportation Energy-InsuranceWe find that the relative de-ratings have been 50% correlated to our 2019 composite scores for sectors and IGs. For sectors and IGs, we compare the de-rating in 2018 to the 2019 composite score based
26、 on the key themes/ drivers. The fairly high correlation suggests that some of the relative risks/upside have been priced, but not all of it.The line in Figure 15 represents the theoretical one-to-one trade-off between the relative re-rating/performance in 2018 on the X-axis and relative fundamental
27、s on the Y-axis. In the bottom left quadrant, we find that certain sectors and IGs have de-rated by more than the deterioration in relative fundamentals. For instance, Energy and Capital Goods stand out as having better potential for relative upside in 2019 on this basis. On the flip side, the weake
28、r fundamentals have not necessarily been fully priced for Materials, Autos & Comp and REITs.On the upside, we find that Pharm/Biotech, Consumer Svcs, Media & Enter and Transports are not fully pricing their relatively better fundamental backdrops. On the other hand, Food & Staples Retail stands out
29、as having one of the largest reratings higherdespite average fundamentals. Healthcare Equip & Svcs, Tech Hdwr and Software & IT Svcs have solid fundamentals but seem to be pricing more of it.In the middle, on the dashed line, Semis, Banks, Div Fins and Staples have re-rated in line with relative fun
30、damentals on our measures.0.8Figure 15: Relative de-rating in 2018 (x-axis) versus relative fundamental score (y-axis)0.6Equip & Svcs40.40.20.0-0.2-0.4-0.6-0.80.5 Tech Hdwr & Equip Software & Svcs2018 De-Rating Score (negative score can catch up)Green = attractive(Ms-PBM 一)ajous wsodEOu6L0ZFood & St
31、ap Retail ;1.0Source: UBSAt a style/factor level: quality, momentum and growth should lead at this stage, but they are not cheapSimilar to sectors and industries, we find that the styles and factors that should lead at this stage of the cycle when the ISM is high/falling and through the later stage
32、when ISM is low/falling are relatively expensive.Similar to sectors and industries, we find that the styles and factors that should lead at this stage of the cycle when the ISM is high/falling and through the later stage when ISM is low/falling are relatively expensive.Quality Is the best performing
33、 factor from an ISM peak to a trough, but higher quality stocks are relatively expensive versus history, and lower quality stocks are relatively cheap.Momentum also tends to work through the last half of a cycle, performing best in the current phase when the ISM is high/falling. The recent unwind of
34、 high momentum stocks has made the relative valuation gap less extreme, but valuation is by no means a tailwind.Growth has outperformed value on average at this stage, though FCF yield has worked best through an ISM peak to trough cycle on average. When the ISM falls below the midpoint, growth tends
35、 to lag as a factor. In particular, high growth stocks tend to significantly underperform. On the flip side, value actually has outperformed on average when the ISM fell below 52.5, with FCF yield and dividend yield standing out.Large has outperformed small when the ISM fell from a peak. We see a nu
36、mber of factors as supporting large cap outperformance versus small at this stage including relative margins, rate sensitivity, pricing power and labor costs.Figure 16: Factor performance when ISM high/falling vs. low/falling, and relative factor valuationsBubble size = relative valuation of high vs
37、. lowBubble size = relative valuation of high vs. lowOPAONs- Mu 三 elxpee Mo-詈-np 七 d25%20%15%10%5%0%-5%-10%-15%-20%-25%Red bubble = expensive vs. historyGreen bubble = cheap vs. historyComp QualityQuality perf best from ISM peak totrough, but it is relatively expensiveFCF Yield (trailing)Comp ValuEY
38、 (trailing) Dividend Yield (trailing)笔E joEY(NTCF margin Gross Profit marginEBITDA marginNet Debt to EBITDA Book to Price (trailing)1 rShort Interest RatioTotal Debt to EVBeta 12mVolatility 12m-8%-6%-4%-2%0%arket CapPrice Mom (12m ex -|m)jomp Mom ntum Earnings Revision 3mEarnings growth 1Y trailing
39、Earnings growth 1Yfwd 111，Sales growWlY fwdSales Revision 3mComp GrowthSales growth 1Y trailingGrowth does well when ISM is high/falling, but lags later cycle2%4%6%8%10%12%14%Perf during High and Falling ISM cycleSource: S&P, Compustat, IBES, UBS Note: Bubble size is based on NTM P/E and z-score sin
40、ce 2010; average performance during ISMcycles,high vs. lowquintile within the S&P 500, non sector neutral.Sector, industry and style recommendationsThe 2019 composite score can be thought of as how we would be tilted if relative fundamentals, cycle profile and risks were the only deciding factors.Ho
41、wever, 2018 was far from a normal year and we are factoring in that some of this may be priced, and account for catch-up potential.The 2019 composite score can be thought of as how we would be tilted if relative fundamentals, cycle profile and risks were the only deciding factors.However, 2018 was f
42、ar from a normal year and we are factoring in that some of this may be priced, and account for catch-up potential.In the table below, we assign a weight of 30% to the de-rating score, assuming the potential for a reversal in returns in 2019 and a recoup of 30% in the P/E decline. We assign a 70% wei
43、ght to the 2019 composite score based on the key themes and drivers for the year. Based on the weighted average of the 2019 composite and de-rating score, our summary sector and IG allocation are: Overweight: Healthcare, Communication Svcs, Energy, IndustrialsUnderweight: Utilities, Real Estate, Mat
44、erials, and tactically u/w Technology Neutral: Discretionary (prefer Consumer Svcs, some Retail), Staples (Food Bev Tob over Staples Retail, HH&Per Prod), Financials (Insurance over Banks, Div Fin)We stick with leadership amongst the defensives, staying overweight Healthcare and underweight Utilitie
45、s and REITs. Healthcare has the highest 2019 composite score based on: 1) outperformance at this stage of the cycle, 2) better margin trends, 3) little tariff risk, 4) dividend upside, and 5) solid growth and momentum. We stay neutral Staples after upgrading it in early Sept (link), but would look t
46、o potentially add some Staples exposure if the cycle slows more than we think next year. Similarly, Utilities have performed well this year, more than typical at this stage of the cycle; but we would also look to add exposure if there is a need to get more defensive next year or the sector gets rela
47、tively cheaper.Figure 17: Sector and IG summary, recommendations and rationaleSource: UBSSectorRatingAvg wtd 30/702018 DeRating (Catchup)2019Composite ScoreISMCycleMargi i Risk/ Decele rPricing & Wages Sit nalTrade RiskDividend/ Payout UpsideGrowth/ MomentumC-Speak: Corp SentimentQuality + FCFEnergyO/W1P11I1J1MaterialsU/W1I11