Large-cap technology stocks have generated spectacular returns over the last decade — but big tech won’t stage a second act in the next one, according to UBS.
In its monthly letter, released Friday, the investment bank said investors will need to look at other areas of the market if they want above-average growth in the future.
Television offers one clue of what’s next: genetic therapies.
“Fans of Netflix’s documentary series Unnatural Selection will know that genetic therapies represent a paradigm shift in medicine, with the potential to revolutionize healthcare delivery and disrupt the biopharma industry,” according to the letter.
UBS cites gene-editing developments at MIT and Harvard that have the potential to address the vast majority of genetic diseases, as well as recent regulatory approval for gene and cell therapies for cancers.
“Large-cap pharma is sitting up and taking note, and we therefore expect to see heightened deal activity in the next decade,” according to the monthly note.
[II Deep Dive: Biotech IPOs Are a Mixed Bag for Hedge Funds]
In addition, investors should buy the stocks of companies focused on sustainable investing, digital transformation, and businesses that are addressing global water scarcity, the bank said.
At the same time, equity returns will likely be lower in the coming decade than they were in the past one, according to Mark Haefele, chief investment officer of global wealth management at UBS and author of the report.
“We believe stocks are still likely to outperform other publicly listed asset classes,” wrote Haefele. “It might seem hard for investors holding cash to buy in now after such a sustained rally, but investing is about looking forward, not back. Systematic put selling or capital protection strategies are both approaches that can help investors manage their fears around near-term equity volatility.”
Haefele wrote that investors should be more sanguine about investing at all-time highs compared to other periods. According to UBS, in the six months after any given record high in the Standard & Poor’s 500, markets have returned an average of 4.7 percent, compared with 4.2 percent at other time. UBS analyzed data going back to 1950.
The Swiss firm recommends investors capitalize on the trend toward sustainable investing. Even if the returns potential of these strategies aren’t proven, there is increasing demand. “Consumers, governments, and regulators are all going to be big drivers of a shift toward sustainable investments and products over the next decade,” according to UBS.
Technology is still a big investment theme, but it will be about its application and the digital transformation of all companies, said UBS.
To profit, investors should focus their research on a few key themes, including digital data, financial technology, health-tech, security, and tools such as 5G networks and artificial intelligence.
UBS is also urging investors to increase their allocations to private markets in the next decade. UBS expects returns of between 8 percent and 10 percent in private markets, from the illiquidity premium and opportunities not available in public markets.
But investors should be cautious.
“We generally recommend a phased approach to buying into private markets to ensure investors build exposure across the business cycle,” wrote. “At the current stage in the cycle we favor a more defensive approach.”