UBS: Three top ASX sectors (and five stocks) as Australia looks set to avoid a recession

Welcome to Charts and Caffeine - Livewire's pre-market open news and analysis wrap. We'll get you across the overnight session and share our best insights to get you better set for the investing day ahead. 

MARKETS WRAP

THE CALENDAR

Two reads on the state of US manufacturing, Kiwi and Canadian CPI, the RBA's latest minutes, and Aussie jobs data highlight a busy week on the macro front.

THE CHART

Before we get to the bullish part of today's report, I thought it's handy to show you a matrix of where we've been. I find it remarkable to see the correlation of returns between different assets - and just how much red there is. Conclusion? Gold's been OK-ish, energy stocks have lost a lot of their gains, and US short-term bonds (bills) have had a year to remember.

But that's only because everything else has had a shocking year. Perspective is everything.

SECTORS TO WATCH

It's our 100th edition, so we thought we'd give you some positivity to hang your hat on. UBS' Australian team says we can avoid a recession (woohoo!) for the very reason they think the Reserve Bank's terminal rate will be lower than the consensus. In fact, they see the RBA cutting rates by the second half of next year.

With this in mind, they've upgraded their views on one sector (tech, media, and telecoms) while recommending an overweight for the energy and materials space. In addition, they argue cyclical stocks with significant exposures to local consumers are due for a rebound.

The best stocks, in the eyes of strategists, are the ones that have been "unfairly priced" for a recession or are best leveraged to a "peak inflation" narrative. They do issue one caveat though - don't go for stocks where EBIT margins are still elevated compared to their long-term track record. That's just to guard yourself in the event of further earnings re-rates.

Some of the best examples based on this theme include Seven West Media (ASX: SWM), Temple and Webster (ASX: TPW), Adairs (ASX: ADH), Fletcher Building (ASX: FBU), and the most recent of the banks to report Bank of Queensland (ASX: BOQ).

There are actually 32 stocks on the list, but I've given you five of the top-rated ones as examples to take away. 

And just to cap off the whole bullish theme, they still expect the ASX to have a 7,000 end-of-year target. Talk about betting the house on a bounce!

PS - keeping with the bullish theme, Credit Suisse, Morgan Stanley, and UBS all agree Qantas (ASX: QAN) is now a buy following its AGM and profit guidance update. 

THE TWEET

Hans Lee wrote today's report. As it's also Charts and Caffeine's 100th edition, he'd like to express his gratitude to the entire team at Livewire for their assistance and to you for reading every morning. 

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