40 cheap defensive stocks to buy before a recession: UBS

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UBS: Buy these 40 cheap defensive stocks that will continue to outperform as the economy heads toward a recession

Stocks weren't swayed by the soft GDP growth, just as they haven't been weighed down much lately byBut under the surface, UBS sees a worrying sign that many in markets are overlooking: economically sensitive stocks are drastically underperforming their recession-resistant peers.In bear markets that precede downturns, cyclicals have historically lagged defensives by 22% from peak to trough, wrote Sean Simonds, an associate strategist at UBS, in an April 28 note.

First, despite how poorly cyclicals have done compared to defensives lately, a pair of UBS indicators imply that their performance should actually be far worse. The recent decline in the ISM Manufacturing index implies that cyclicals will drop even more relative to defensives.Cyclicals have also fared 8% to 9% better than expected compared to defensives in the last six months after accounting for macroeconomic drivers, a UBS machine learning model found.Second, valuations for cyclicals relative to defensives remain slightly above the long-term average and are expected to fall over one standard deviation before the bear market is over.

Instead, investors should target inexpensive defensive stocks since they're much more appealing than their pricey peers when the economy weakens.

 

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