Spike in risk aversion may be overdone: UBS
Author
Sam Boughedda
Stock Market
Published 2024-08-06, 09:32 a/m
Spike in risk aversion may be overdone: UBS
UBS analysts suggest that the recent spike in market risk aversion may be exaggerated, despite a series of dramatic macro events.
According to the bank, the market's reaction to recent events has been excessive. They stated the sell-off has its roots elsewhere.
The European equity index, SXXP, has dropped 7% from its May peak, with sectors like France, Luxury, Consumer Services, Semis, and Media reverting to January 2024 levels.
UBS analysts argue that "data was only incrementally negative and potentially heavily impacted by Hurricane Beryl." The market's sharp weakness seems to be an overreaction driven by various factors, including low stock correlation and rising volatility.
UBS notes, "In an economic slowdown, volatility (VIX) of 10% was only likely if unemployment doesn't rise."
The analysts also highlight the role of forced sellers, explaining that when volatility rises, funds targeting consistent volatility levels become sellers, increasing risk premia.
Moreover, they point out that equity market weakness exceeds the rise in discount rates, and with ECB rate cuts underway, a European credit cycle that justifies wider spreads is unlikely.
Drawing a parallel to 2018, UBS recalls that after the S&P 500 fell 20%, the Fed reversed its restrictive policy, leading to a swift market rebound. They believe this historical precedent suggests that current market fears may be overblown.
UBS identifies immediate opportunities, noting that volatility supports 'quality' demand. They see 'quality' stocks like RELX and ASML (AS:ASML) outperforming 'momentum' and 'value' in Europe.
Additionally, they have favored Utilities for their growth on modest valuations, highlighting European utilities as strong performers in late 2018. UBS analysts remain bullish, expecting average total returns of 26% on Buy-rated names.
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