Global stock markets have had a good run recently. In November, the FTSE 100 index rose about 12%. Meanwhile, the S&P 500 climbed about 11%.
Can the market keep rising? Wealth management giant UBS believes so. In a recent research note, the firm wrote: “We believe the rally can continue.”
However, UBS also believes stock market dynamics are changing. Here’s a look at where the money manager believes investors will find the best opportunities if the market continues to rally.
Since Pfizer‘s 9 November announcement it has developed an effective coronavirus vaccine, cyclical and value stocks have outperformed growth stocks. The MSCI Europe, which has a more cyclical bias, has thrashed the growth-focused S&P 500 over this period.
Looking ahead, UBS believes this trend is set to continue. It expects value stocks to drive the stock market rally.
Smaller tech plays
In 2020, mega-cap US technology stocks such as Apple, Amazon, and Microsoft have delivered amazing returns for investors. These companies have outperformed the broader market by a wide margin.
Going forward however, UBS thinks this area of the market is unlikely to perform as well. It points out that, since 1973, if a US equity sector was a top two performer over the previous 10 years, it had only an 8% chance of staying there over the next 10 years. Worryingly, it had a 25% chance of falling into the bottom two sectors.
UBS believes that the next decade is likely to reward those who invest in disruptors in sectors undergoing technological transformation. It sees the greatest opportunities in areas such as 5G, FinTech, HealthTech, and GreenTech.
Green energy companies
Finally, UBS believes the Joe Biden administration is likely to add momentum to the green agenda. It expects the administration to use executive orders and other regulatory tools to promote sustainability. Green energy stocks therefore, could play a key role in a stock market rally.
Stock market rally: UK investment opportunities
The good news for UK investors is that it’s not hard to gain exposure to the areas of the market that UBS is bullish on.
In terms of value stocks, there are plenty of opportunities at the moment. Some value stocks I like right now include financial services giant Legal & General, which currently sports a P/E ratio of less than nine. Then there’s defence legend BAE Systems (P/E of 10) and insurance powerhouse Prudential (P/E of nine). These stocks – which have all underperformed this year – have bounced recently, but could have plenty more upside.
In the tech space, there are some really exciting up-and-coming players listed on the London Stock Exchange. Examples include identity management company GB Group, digital marketing group dotDigital, and data champion YouGov. All of these companies look set for strong growth in today’s digital world.
Green energy is another area where there are plenty of opportunities for UK investors. Not only do we have many fast-growing clean energy companies, such as ITM Power and Ceres Power Holdings, but we also have plenty of investment trusts focused on the industry. You can find out more about UK renewable energy stocks here.
Overall, there could be many opportunities for UK investors if we see a sustained stock market rally. The key, as always, is to diversify money over many different stocks to lower overall portfolio risk.
Edward Sheldon owns shares in Apple, Amazon, Microsoft, Legal & General, BAE Systems, Prudential, GB Group, and dotDigital. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool’s board of directors. The Motley Fool UK owns shares of and has recommended Amazon, Apple, and Microsoft. The Motley Fool UK has recommended dotDigital Group and Prudential and recommends the following options: long January 2022 $1920 calls on Amazon and short January 2022 $1940 calls on Amazon. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.