UBS says this economy is going through ‘slowflation’ and gives stocks to play it

UBS believes the U.S. is about to enter a period of “slowflation,” not stagflation. The investment bank said in a note Tuesday that it sees the economy entering a slowflation period in the next 12 to 36 months. Unlike stagflation periods that are characterized by stagnant economic growth and high inflation, slowflation periods are marked by slow economic growth with moderately high inflation, strategists wrote. “Inflationary pressures are elevated today, especially in developed markets, but are likely to ease from here, in our view. Our economists believe US inflation has already peaked and Europe’s will do so by September 2022,” wrote UBS strategist Nicolas Le Roux. Several sectors are set to benefit during this challenging environment — including energy and materials —that could be “potential overweights,” UBS said. Investors should also look into financials, real estate and communication services sectors, strategists said. Other sectors that could do well are the health care and staples sectors, though “poorer valuations and lagging earnings momentums prevent a higher allocation,” the note read. The bank also highlighted a basket of stocks that could help investors capitalize on this trend. The group is made up of S & P 500 names based on their average monthly performance during slowflation periods, valuations (Z-score of relative 12-month forward price-to-earnings ratio over five years) and earnings momentum over three months. UBS also calculated a composite score that accounts for the three variables mentioned. Here are 10 of the stocks that made UBS ‘slowflationary’ basket: Energy stocks Coterra , Exxon Mobil and Chevron all made the list. The energy sector has been on fire this year thanks to a surge in oil prices. Exxon and Coterra are each up more than 40% this year, while Chevron shares have jumped 26% in that time. Chevron also has the highest average slowflationary monthly performance of any energy stock on the list. AutoZone also made the list given its strong historical performance during these periods and solid earnings momentum. The company is also is well positioned to get through a downturn, given that the bulk of auto parts sales are non-discretionary purchases. The company’s defensive positioning makes the stock a buy, according to a recent note from Goldman Sachs. Other stocks mentioned in this screen include Mosaic, Linde, Public Storage, IDEXX Laboratories, Take-Two Interactive Software and Costco Wholesale.