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UBS is advising clients to steer clear of banks, real estate investment trusts (REITs), and retail sectors, suggesting instead to focus on miners and industrials. This strategy is based on a belief in a stagflationary economy and a central bank that will maintain its current stance for an extended period, which could leave domestic industries trailing behind global counterparts.
Strategist Richard Schellbach’s forecast diverges from mainstream predictions. While some market participants anticipate a rate cut from the Reserve Bank of Australia (RBA) in the near future, UBS suggests the opposite: an expected 25 basis point hike in August, with the first rate reduction not occurring until November 2027—over a year later than many analysts predict.
Deteriorating Earnings Outlook
UBS’s caution also stems from recent trends in earnings. Excluding the resource sector, analysts are downgrading profit projections for most sectors on the Australian Stock Exchange (ASX). The latest economic indicators reinforce the stagflation narrative, revealing challenges for consumers and corporations alike:
- As of April, the unemployment rate climbed to 4.5%, up from 4.3% in March, marking the highest level since late 2021.
- Year-on-year Consumer Price Index (CPI) growth for April stood at 4.2%, a decrease from March’s 4.6%, partly due to a cut in fuel excise duty.
- Core inflation indicators, including a trimmed mean of 3.4% and services inflation at 3.5%, remain above the RBA’s target range of 2-3%.
- The first quarter GDP increased by just 0.3% quarter-on-quarter and 2.5% year-on-year, fell short of expectations.
- The Fair Work Commission’s decision to raise the minimum wage by 6.0% and modern award wages by 4.75% adds more pressure on businesses.
With the economic landscape hinting at stagflation and ongoing downward revisions in estimates, UBS argues that it may be increasingly difficult for investors to overlook these cycles. This perspective is corroborated by the ASX 200’s performance, which lagged behind global markets amid tensions stemming from international conflicts.
Source: TradingView
Valuation Concerns
Current market dynamics are further complicated by elevated starting valuations. Many stocks within the ASX 200, particularly in the industrial sector, are trading above their historical average price-to-earnings ratios. In contrast, while REITs and consumer stocks have seen a decrease in valuations in recent months, UBS remains sceptical about their recovery potential.
The following illustrates the disparity in valuation among various sectors:
- Banks: 18.6x forward earnings for 2026
- Consumer Discretionary: 26.0x, which is the highest among domestic groups
- Real Estate: 18.8x, despite evident earnings risks
- Materials: 17.5x, viewed as the preferred investment area
- Industrials: 25.3x, a sector UBS still favours despite high valuations
Overall, the ASX 200 trades at 19.7x forward earnings for 2026, with expected profit growth around 12% that year.
Sector Preferences
UBS continues to favour certain sectors amid cautionary sentiment:
- Miners: Rated as the top ‘Overweight’ sector. Despite full valuations, UBS believes prices can rise as funds move from banks to resource sectors.
- Industrials: Also rated as ‘Overweight’ due to anticipated government spending, offering local investors indirect exposure to technological advancements without venturing into international stocks.
The detailed sector ratings by UBS are as follows:
- Overweight: Mining, Industrials, Healthcare, Insurance, Small Caps, TMT (technology, media, and telecommunications)
- Neutral: Energy, Consumer Staples, Infrastructure, Utilities
- Underweight: Banks, Consumer Discretionary, Real Estate
UBS has maintained its year-end ASX 200 target at 8,800 points, highlighting the potential for the local market to lag behind the ongoing global equity bull run. The overarching theme indicates that as long as the economy exhibits stagflation and earnings continue to decline, investment prospects in sectors closely linked to the Australian housing market and consumer spending will remain challenging.
