They say the build-up to Christmas begins earlier each year but, in truth, it always seems to swing into gear about now. The summer holidays are over, the kids are back at school and thoughts turn to the office Christmas party. But the team at UBS are one step ahead, and have already decided which shares they think will thrive in 2018.
Seventeen analysts were asked to flesh out their most – and least-preferred ideas around key themes which they think “will either come to fruition in 2018 or will be widely discussed”.
There are 45 stocks from across Europe on the ‘buy’ list and 36 sells, and UK equities feature heavily, accounting for a third of the most-favoured and a quarter of the least-favoured.
Popular high-street lender Lloyds Bank (LLOY) is near the top, and we’ve recently outlined UBS’s thinking behind its 85p price target. The other banks backed by analyst Jason Napier are listed on the continent, including Sabadell. Of the London-listed contingent, he is ‘neutral’ on both HSBC (HSBA) and Standard Chartered (STAN).
European company earnings have seen no growth in the past six years. However, 2017 looks set to deliver 12.8% growth in profits, we’re told, and UBS reckons this structural turn in the profit cycle will continue into 2018 and beyond.
Further, at 3.6%, European equities offer the best yield versus both history and competing asset classes including US equities (2.1%), US 10-year bonds (2.1%) and UK 10-year bonds (1.1%). “We believe this is sustainable,” says UBS.
“We think Europe is healthier now and welcome the end of quantitative easing/higher rates… In our hunt for global yield, Europe looks like a compelling choice.”
Below, we pick out a few key buys and round up the least favoured from UBS’s list.
Three top buysSainsbury’s
One of the biggest potential sector disruptors currently is Amazon (AMZN). The online shopping behemoth’s acquisition of Whole Foods could pose a big risk for food retailers here. In the days following the announcement, supermarket shares fell sharply.
However, while UBS sees the former book store having some influence on the grocery market, “on a mid-term view, we see limited impact”.
We’re unlikely to see an “end-of-days” store roll-out some have predicted from Amazon and, as Amazon’s e-commerce model does not lower cost-to-serve in groceries, “price, historically its biggest weapon, is neutralised”.
Both Sainsbury's (SBRY) and Tesco (TSCO) are favoured here, with price targets of 350p and 235p respectively. That means the former, with upside potential of almost 50%, is the highest conviction selection.
Away from the grocery side, “Sainsbury’s [is] now one of a rare breed of UK brick-and-mortar retailers actually seeing growth in clothing,” explains analyst Daniel Ekstein.
WPP (WPP) shares were sunk three weeks ago when boss Sir Martin Sorrell told investors his forecast for net sales growth in 2017 would be lower than previously estimated. He put a figure of between 0% and 1%, down from 2%.
WPP said all regions except the UK, Latin America and central and eastern Europe showed lower revenues than the prior year in July and all sectors were down.
Since then, the stock’s seemingly meteoric rise has stalled and it’s down 13%, and 28% since its peak of 1,928p in March.
However, UBS thinks that the recent step-down in media spend is temporary, noting that it will need to inflect in order for consumer brands to stay relevant and meet analyst expectations for organic growth.
After the update, analyst Richard Eary re-iterated his ‘buy’ rating, albeit with a reduced 1,900p target. He reckons WPP looks oversold, trading on 9 times adjusted FY18 earnings per share (EPS) and with a dividend yield of 5%.
“Revised forecasts see WPP deliver a 6-7% three-year EPS compound annual growth rate driven by capital management, M&A and simplification of the business model.”
According to UBS, investors are currently considering the scale and duration of the increase in US shale oil production in response to the stabilisation of oil prices at around the $50 level. The broker reckons US production will reach 11 million barrels per day by December 2018.
“As the largest single source of supply growth over 2011-15 and the largest single source of decline in 2016, investors are understandably focused on the US. As a short/medium term influence we see shale creating a shallow price rebound in the next one to two years but it not being big enough… to set the oil price for the global market.”
UBS’s one favoured stock in the European oil space is Royal Dutch Shell (RDSB), with a ‘buy’ rating and 2,550p target price, which suggests potential upside of 17% and a forward yield of 5.7%.
Analyst Jon Rigby says Shell’s July second-quarter numbers reinforce the investment case, that “the combined Shell/BG business can produce attractive cashflow which… will generate free cashflow to fund the dividend and reduce debt”.
“Having missed the 1990s industry consolidation, the BG deal was long overdue,” he says. “The scale and quality of the portfolio places Shell in a class of two with ExxonMobil (XOM), its historic peer.”
Other notable names on UBS’s most-preferred list include Vodafone (VOD) (target price 280p), easyJet (EZJ) (1,465p), Prudential (PRU) (2,200p) and Next (NXT) (4,900p).
In contrast to Sainsbury and Tesco, both Ocado (OCDO) and Morrisons (MRW) are amongst the least-favoured in the European food retail sector. Ocado is the least-favoured of all companies mentioned; its £2 target implies downside of 35%. Morrisons has a target price of 250p and ‘neutral’ rating.
Those with sells include Legal & General (LGEN) (200p), Kingfisher (KGF) (265p) and ITV (ITV) 170p).
This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.