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Investing.com -- In a note this week, UBS analysts outlined eight pivotal questions that are currently shaping the global equity market.
The note delved into potential market bubbles, regional performance, and the impact of emerging technologies.
"Can we get an equity bubble? Yes," UBS analysts state, identifying six out of seven preconditions for such a scenario.
They suggest that if "China print and QT ends mid-year, we potentially get all 7."
However, they clarify that "in general no," the market is not currently in a bubble, noting the current valuation of the "Mag 6" at 33x 12-month trailing P/E, below the typical 45x threshold seen in bubble scenarios.
Regarding US market performance and whether it will outperform, UBS takes a cautious stance. "We are benchmark within a 100% dedicated equity portfolio and see the relative risks to the downside."
They point to factors such as "relative valuations remain extreme," a "slowdown in the relative rate of buybacks," and the US being "very crowded on UBS data." They also note that "relative GDP growth differentials with Europe and Japan are closing."
UBS also addresses the impact of rising bond yields, suggesting that "c5% US 10-year" would pose a problem for equities.
On the topic of a potential manufacturing recovery, they recommend "analog semis," while expressing skepticism about a "normal recovery in manufacturing (owing to China needing to focus on consumer-driven growth, not investment)."
The analysts also discuss the implications of DeepSeek, stating that it "modestly" alters their views. They believe "electrification concerns are overdone" and that DeepSeek is "highly deflationary," benefiting non-tech sectors. They also see it supporting their "top-down preference for China tech."
Regarding China, UBS confirms that "Yes" they can be overweight China equities, "if UBS forecast 3.7% nominal GDP growth" due to improved earnings revisions in a cheap and under-owned market.
European recovery plays include "Retailing, budget airlines, specific construction names," and "banks, despite being up 20% YTD, should continue to outperform."
Finally, UBS justifies being "underweight global cyclicals (ex tech and financials) but overweight banks," citing high PMI pricing and rolling over earnings revisions in cyclicals.
They recommend select defensive areas alongside targeted exposure to European recovery and financials.