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June 21, 2021, 3:23 a.m. EDT

Buy these 6 types of stocks next as Big Tech falters and inflation falls, says Swiss bank UBS.

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Jack Denton

U.S. stocks were in the red on Friday, following a tumultuous Thursday that saw technology companies help the Nasdaq eke out gains while the Dow and S&P 500 fell.

It’s time to reevaluate the market landscape.

Our call of the day , from chief investment officer Mark Haefele’s team at UBS /zigman2/quotes/206172872/composite UBS +1.53% Global Wealth Management, urges investors to look at six types of stocks.

The group at the Swiss bank identifies two major trends ahead: gains for Asian markets as COVID-19 vaccinations help local stocks; and a fall in inflation from currently-elevated levels.

These dynamics require investors to find new opportunities. While UBS maintains a positive outlook on global equities, the bank has six stock picking ideas.

One is to diversify technology holdings away from mega-caps in the U.S. and Asia like Apple /zigman2/quotes/202934861/composite AAPL +1.20% , Amazon /zigman2/quotes/210331248/composite AMZN +0.51% , Alphabet /zigman2/quotes/202490156/composite GOOGL +3.58% /zigman2/quotes/205453964/composite GOOG +3.37% , Facebook /zigman2/quotes/205064656/composite FB +5.30% , Alibaba /zigman2/quotes/201948298/composite BABA -3.51% , and Tencent /zigman2/quotes/204605823/delayed HK:700 -2.39% . UBS sees “limited near-term catalysts” for these stocks. Instead, Haefele’s group identified opportunities in digital leaders in Europe; small and midsize firms exposed to trends like 5G, fintech, greentech, and healthtech; and digital subscription businesses.

Another is to buy energy stocks—even though this sector has risen nearly 50% so far this year. It’s now only at pre-pandemic levels, UBS said, while the S&P 500 index is 25% higher than its peak in February 2020. Rising oil prices, which the bank predicts are coming, should boost these stocks.

The third idea is to invest in financials. S&P 500 financial stocks, like banks, have rallied 9% since the beginning of March, and macro trends—like higher yields—pave the way for more gains, UBS said.

Investors should also favour U.S. small- and midcap stocks—that is, companies with a market capitalization below $10 billion but above $300 million. “On a price-to-earnings basis, U.S. small- and mid-cap valuations are near 20-year lows relative to large caps, despite the likelihood that earnings growth for smaller companies will outpace large-cap earnings through at least 2022,” Haefele’s team said.

But the biggest opportunities, according to UBS, are in Asia.

Chinese equities have faced setbacks in recent months, with the MSCI China index falling into bear territory in May amid higher U.S. yields and antitrust measures against Chinese tech companies. So buy the dip, the Swiss bank said.

For its sixth, UBS also predicts gains in Japan, which is geared to the global recovery. The group expects 40% growth in earnings per share for the MSCI Japan index this year, which is good news for Japanese stocks.

It should be noted that there are risks to a global rally, UBS said. More persistent inflation, slower growth, geopolitical tensions, and a resurgence in COVID-19 all pose a threat to another equity rally.

The markets

U.S. stocks /zigman2/quotes/210598065/realtime DJIA +0.68% /zigman2/quotes/210599714/realtime SPX +1.01% /zigman2/quotes/210598365/realtime COMP +1.04% were into the red by midday, as investors continue to absorb the Fed’s shifting position on rates and inflation . European equities /zigman2/quotes/210599654/delayed XX:SXXP +1.09% /zigman2/quotes/210598409/delayed UK:UKX +0.85% /zigman2/quotes/210597958/delayed FR:PX1 +1.35% /zigman2/quotes/210597999/delayed DX:DAX +1.00% were similarly down across the board, while Asian stocks /zigman2/quotes/210597971/delayed JP:NIK +0.58% /zigman2/quotes/210598030/delayed HK:HSI -1.45% /zigman2/quotes/210598127/delayed CN:SHCOMP -0.68% finished the day more mixed.

The chart

Our chart of the day, courtesy of Wolf Richter at the Wolf Street financial blog , shows the massive spike in cash at the Fed following Thursday’s overnight reverse repo sale. It “drains over six months of [quantitative easing] from the market,” Richter said.

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/zigman2/quotes/206172872/composite
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$ 15.93
+0.24 +1.53%
Volume: 2.85M
July 23, 2021 4:00p
P/E Ratio
7.71
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2.30%
Market Cap
$55.20 billion
Rev. per Employee
$450,560
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US : U.S.: Nasdaq
$ 148.56
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Volume: 71.45M
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P/E Ratio
33.34
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0.59%
Market Cap
$2479.11 billion
Rev. per Employee
$1.86M
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/zigman2/quotes/210331248/composite
US : U.S.: Nasdaq
$ 3,656.64
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P/E Ratio
69.59
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N/A
Market Cap
$1844.13 billion
Rev. per Employee
$297,430
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US : U.S.: Nasdaq
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35.42
Dividend Yield
N/A
Market Cap
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$1.35M
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/zigman2/quotes/205453964/composite
US : U.S.: Nasdaq
$ 2,756.32
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36.70
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N/A
Market Cap
$1813.90 billion
Rev. per Employee
$1.35M
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/zigman2/quotes/205064656/composite
US : U.S.: Nasdaq
$ 369.79
+18.60 +5.30%
Volume: 33.69M
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P/E Ratio
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N/A
Market Cap
$1048.53 billion
Rev. per Employee
$1.47M
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/zigman2/quotes/201948298/composite
US : U.S.: NYSE
$ 206.53
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Volume: 25.54M
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P/E Ratio
25.81
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N/A
Market Cap
$572.49 billion
Rev. per Employee
N/A
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/zigman2/quotes/204605823/delayed
HK : Hong Kong
$ 531.00
-13.00 -2.39%
Volume: 16.76M
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P/E Ratio
25.01
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0.30%
Market Cap
$5039.74 billion
Rev. per Employee
$10.55M
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/zigman2/quotes/210598065/realtime
US : Dow Jones Global
35,061.55
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Volume: 315.06M
July 23, 2021 5:16p
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/zigman2/quotes/210599714/realtime
US : S&P US
4,411.79
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Volume: 1.78B
July 23, 2021 5:16p
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/zigman2/quotes/210598365/realtime
US : Nasdaq
14,836.99
+152.39 +1.04%
Volume: 3.50M
July 23, 2021 5:16p
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/zigman2/quotes/210599654/delayed
XX : STOXX
461.51
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Volume: 0.00
July 23, 2021 11:03p
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/zigman2/quotes/210598409/delayed
UK : FTSE UK
7,027.58
+59.28 +0.85%
Volume: 426,695
July 23, 2021 4:52p
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/zigman2/quotes/210597958/delayed
FR : France: Euronext Paris
6,568.82
+87.23 +1.35%
Volume: 56,118
July 23, 2021 6:05p
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/zigman2/quotes/210597999/delayed
DAX
DX : Xetra Indices
15,669.29
+154.75 +1.00%
Volume: 54,897
July 23, 2021 6:30p
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/zigman2/quotes/210597971/delayed
JP : Nikkei
27,548.00
+159.84 +0.58%
Volume: 0.00
July 21, 2021 3:15p
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/zigman2/quotes/210598030/delayed
HK : Hong Kong Exchange
27,321.98
-401.86 -1.45%
Volume: 1.18M
July 23, 2021 4:08p
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/zigman2/quotes/210598127/delayed
CN : China: Shanghai
3,550.40
-24.34 -0.68%
Volume: 44.64B
July 23, 2021 3:01p
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