Equity rally has further to run despite stagflation fears – UBS

Amid surging energy prices, fears of stagflation dominated the early part of last week, but signs of progress on US fiscal negotiations helped equities finish the week in positive territory. Economists at UBS continue to see equity upside and recommend buying the winners from global growth, including energy and financials.

Stagflation fears are overdone

“Our base case is that while growth rates may have peaked, growth will remain robust in the coming quarters while inflation recedes from this year’s spike. Clearly, stagflation would undermine this scenario, but we think these fears are overdone.”

“We expect only a modest impact on growth and inflation from the current increase in energy prices. The risk to our analysis is a harsh Northern Hemisphere winter that causes energy prices to spike again, disrupts industrial production and delivers a larger hit to GDP.”

“We continue to see equity upside and recommend buying the winners from global growth, including energy and financials. Given that part of the rise in energy has been due to the run down in investment in fossil fuels, we believe investing in traditional energy and industrial metals as well as in greentech is a diversified, realistic way to participate in the transition to net-zero carbon.”