According to the chief strategist at UBS Investment Bank, global economic conditions will change over the next year and that will reverse which markets and sectors are underperforming. Bhanu Baweja told CNBC’s Squawk Box Europe on Wednesday that between a third and half of the countries the bank covers worldwide are facing a recession. “It’s an inch deep, but it’s a mile wide,” he said of the expected recession. “Global growth is 2% and that’s not priced into stocks.” UBS expects the US core consumer price index for November, which excludes volatile food and energy costs, to come in below 0.3% for the month. As a result, Baweja said market expectations for a hawkish Federal Reserve will come down somewhat, which will help companies’ price-to-earnings ratios. Earlier this month, lower than expected inflationary pressures sparked a cautious market rally in October. Baweja pointed to the underperformance of the S&P 500 this year, down 15.5% compared to the 9.6% decline in the European Stoxx 600. “That’s because this was an assessment year, this was a year your risk-free rate, your real rate, your two-year real rate moved 500 basis points. So this has been a year of belittlement,” he said. But the problem next year will be earnings, Baweja said, especially given the recessionary headwinds. He expects “fairly ordinary” stock returns next year given competition from strong bond yields, but he sees US stocks outperforming European ones. “Life isn’t zeros and ones and black and white, but when most of the problems are going to happen in the next year [earnings], then Europe is more at risk than the US,” said Baweja. A reversal will also be seen in the sectors he predicted, cyclicals doing very well – commodities and energy. These are sectors that most people would consider cyclical, these are sectors that have performed extremely well and that’s why cyclicals have performed at such high levels,” he said, also citing financials with solid balance sheets. But he stressed that a number of factors will change as you approach near-2% global growth, “which is as close to a recession as you can get.” “I think next year will it’s going to be a lot more defensive than cyclical, so your classic utilities, technology, maybe healthcare, those are likely to do a lot better, and even some consumers are likely to do a lot better than the producer side of the economy, which is materials and industrials,” Baweja added .
