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Home Best Stocks to Buy Now

While Citi downgrades U.S. stocks, Bernstein upgrades European stocks

by Elaine Mendonça
January 21, 2022
in Best Stocks to Buy Now
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Citi downgrades U.S. stocks

Source: Getty Images

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1 Tech stocks under pressure
2 Bernstein thinks that the best stocks have to be found in Europe
3 Cutting Carbon emissions as an alternative

Tech stocks under pressure

Citi anticipates that the yield on the benchmark 10-year US Treasury note will rise toward 2% over the next year. The rate was last at 1.18 percent, following a drop in yields since March, and it dropped back near a five-month low on Monday. (Yields move in the opposite direction of bond prices.)

Rising interest rates discount the value of future earnings and, as a result, can be particularly damaging to growth stocks such as technology names.

Tech stocks under pressure
Source: Getty Images

“It comes as no surprise to us that the recent bond market rally has also seen strong outperformance from IT,” wrote Citi chief global equity strategist Robert Buckland in a note. “Some of that could be reversed if real yields rise again.” For example, a rise in US 10-year real yields to -0.5 percent would imply a 5-10% underperformance in the global IT sector, according to historical data.”

According to Citi, a “heavy growth stock weighting” makes the United States particularly vulnerable.

As yields fell, the Technology Select SPDR, which tracks the S&P 500’s technology stocks, rose 12 percent in the last three months.

Citi attributes the recent decline in bond yields to technical factors and expects it to reverse.

“US treasury issuance has declined over the summer, but will rise again later in the year,” according to the note. “Global economic recovery and likely monetary tightening should drive yields higher again.”

Citi downgraded global IT shares to neutral, but the firm remains bullish on financials and materials.

“A reversal of the recent drop in nominal yields should be very beneficial to the global financial sector,” according to the report. “The historical relationship suggests that a shift to a US nominal yield of 2.0 percent could result in a 10-15% outperformance.”

Citi upgraded Japan to overweight among global equity markets, citing low valuations and sensitivity to the global economic recovery. Citi is also still underweight in the United Kingdom.

Bernstein thinks that the best stocks have to be found in Europe

Bernstein upgrades European stocks
Source: Getty Images

Value stocks appear to be trading at a lower price than the rest of the market.

“The underperformance of Value in recent weeks has been driven by both fundamentals – a decrease in the relative earnings momentum for Value stocks, as well as a sharp move in the bond market pricing in lower growth and lower inflation in particular in the US,” analysts led by Sarah McCarthy wrote in a research note published Thursday. Stocks typically fall when investors seek safe havens such as bonds due to growth concerns.

“In the bond market, growth and inflation expectations in the United States have taken a sharp hit, whereas inflation expectations in Europe continue to rise,” the analysts said, noting that value stocks tend to outperform during periods of higher inflation.

Higher vaccination rates in Europe, as well as continued economic growth and a better earnings outlook, indicate that the region will likely outperform the United States, according to Bernstein.

“From this vantage point, the tactical outlook (6 months) for Value in Europe is superior to that of the US. We exit our tactical long position in Value in the United States while remaining tactically long in Europe,” the firm’s analysts added.

Bernstein’s “European Composite Value stock list” is comprised of the “cheapest quintile” of the largest 300 stocks in the MSCI Europe Index, as determined by factors such as shareholder payouts.

On its list of outperformers are automakers Daimler and BMW, energy companies BP, Repsol, Engie, and Shell, and U.K. retailer Tesco.

Bernstein also chose mining companies Anglo American and BHP, as well as the pharmaceutical company Bayer.

Cutting Carbon emissions as an alternative

Cutting Carbon emissions
Source: Getty Images

“Carbon has emerged as a critical investment theme. The proportion of funds launched in the last five years with the word “Carbon” in their name has more than doubled compared to the previous five years, and global sustainable investment has increased by 55% from 2016 to 2020,” the analysts wrote in a July 28 research note.

UBS calculated a “composite carbon score” based on the three metrics by comparing carbon emissions to sales, earnings, and market capitalization for each company. It looked for stocks with low composite scores in their sector that its analysts rated as buy or neutral. “A company with a low composite score will be carbon efficient in producing its goods and services, will contribute only a small amount to your portfolio’s carbon footprint, and will hopefully have a lower exposure to carbon risk,” the analysts, led by Claire Jones, stated.

They also mentioned a report from earlier this year that looked at the emissions-to-sales ratio. “We discovered that in most regions, investors could drastically reduce their average carbon intensity without underperforming the benchmark, and in Europe, a low carbon intensity portfolio would have strongly outperformed,” according to the note.

UBS ran screens to identify the best and worst 20 stocks in the United States and around the world, yielding a shortlist of “Most Favored Names from MSCI World by Composite Carbon Score.”

Some of its top buy-rated picks in the United States include real estate firm Prologis, toy company Hasbro, and financial services firm Mastercard.

Global stocks on UBS’s buy-rated preferred list include Tokyo-based payment processor GMO Payment Gateway, French cosmetics behemoth L’Oreal, and German online marketplace Scout24.

Asian firms make the bank’s longer list of buy-rated stock picks, with Asian Paints of India, Bank of Ningbo of China, and chemicals company Shenzhen Capchem Technology making its “most preferred” list from the MSCI AC index (excluding Japan).

Buy-rated French luxury group Hermes, Dutch payment company Adyen, and British data firm Experian are among UBS’s longer list of MSCI Europe index “most preferred” stocks.

In the United States, UBS’s buy-rated long list picks include Nvidia, Arista Networks, and asset manager BlackRock, all of which are part of the MSCI US index.

While politicians and business leaders tout their commitment to the so-called energy transition, fossil fuel use is increasing, and the US Energy Information Administration anticipates an increase in carbon emissions from energy-related sources.

Tags: Best StocksEuropean stocksStock marketUS Stocks
Elaine Mendonça

Elaine Mendonça

My focus is on uncovering early-stage ideas with the potential to have a lasting impact. My educational background includes a bachelor's degree in finance, an MBA, and two tests completed - the CFA and CMT. Over the last nine years, I have managed my investment portfolio using fundamental analysis and value investing, emphasizing long-term time horizons.

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