With the year drawing quickly to a close, many investors may wonder where to put their capital to work in 2018. There is good news. UBS has just listed the sectors and stocks that are most likely to outperform in 2018.
You may be surprised that banks don't make it to the list. If anything, UBS is turning wary on the sector and has moved its recommended capital allocation to the sector from "moderate overweight" to "neutral" following what has been a marginally disappointing reporting season for the big banks.
There's more sombre news for local investors. The broker thinks Australian stocks are likely to lag their international peers as large cap stocks in the US, Europe and Asia are expected to post above-trend EPS growth through the new year, while UBS believes local earnings will be comparatively "sluggish".
Ouch!
But there will be spots of sunshine. The resources sector could deliver upside earnings surprise given that spot commodity prices are generally above the forecasts UBS's analysts have pencilled into their models.
If current spot prices are used, it will imply earnings upgrades of 20% to 30% across the sector.
"We retain our overweight in resources, in part due to an expectation of solid global growth supporting commodity prices, but also because of relatively undemanding valuations and the ability of the resource sector to act as a hedge against rising inflation and interest rates," said UBS.
The broker is recommending investors go overweight on resources and it has a similarly bullish view on financial companies outside of the banks. These "other financials" are better placed to benefit from higher interest rates and buoyant capital markets.
The 10 stocks that UBS is recommending investors buy for 2018 are (in alphabetical order) are: utility company AGL Energy Ltd (ASX: AGL), poker machine maker Aristocrat Leisure Limited (ASX: ALL), mining giant BHP Billiton Limited (ASX: BHP), US-focused logistics company Brambles Limited (ASX: BXB), global asset manager Henderson Group plc (ASX: JHG), admin services company Link Administration Holdings Ltd (ASX: LNK), integrated energy group Origin Energy Ltd (ASX: ORG), airline Qantas Airways Limited (ASX: QAN), casino operator Star Entertainment Group Ltd (ASX: SGR) and supermarket giant Woolworths Limited (ASX: WOW).
UBS Top 10 Stocks for 2018
Just don't expect big gains for the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) as the broker is tipping the index to end at 6,275 by the end of 2018, which is a little over 5% above where the market is currently standing.
Having said that, there could be better gains to be had at the smaller end of the market. Click on the link below to see three hot stocks that the experts at the Motley Fool are tipping to be big winners in 2018.
