ASX shares are having a great day on Friday, with the S&P/ASX All Ordinaries Index (ASX: XAO) up 1.9%.
And there's more to come, according to top broker, UBS.
The Australian reports that UBS has upgraded its outlook for the Australian technology and consumer discretionary sectors, and downgraded consumer staples.
That is the complete opposite of market sentiment all year.
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Why does UBS think ASX shares are about to flip?
S&P/ASX 200 Consumer Staples (ASX: XSJ) are down 9.5% in 2022. But that's nothing compared to S&P/ASX 200 Info Technology (ASX: XIJ), down 36%, and S&P/ASX 200 Consumer Discretionary (ASX: XDJ), down 24%. And that's where UBS sees value today.
The broker has altered its outlook because ASX shares are now "priced for a recession" next year. And the UBS team reckons it's not going to happen.
This is because the Reserve Bank has signalled it intends to slow down the pace of interest rate hikes.
UBS equity strategist Richard Schellbach said:
Domestic cyclicals have been notable underperformers, with sectors exposed to the local consumer or housing down about 30 per cent year to date.
Given we do not expect a recession to play out in Australia, these moves seem overly pessimistic, and present an opportunity to buy into some high-quality businesses with solid medium-term prospects.
He argues that domestic cyclical ASX shares are "no longer expensive":
Despite gloomy press headlines, and continued challenges from supply chain constraints, input cost pressures, and more recently labour market shortages, the reality is that the end-demand which ASX businesses are seeing is firm.
Schellbach notes that Australia had an "even more abrupt" rate hiking cycle in 1994 with no recession. ASX shares rose by 16% in 1995 and returned 11% per annum for the next five years.
The Australian Financial Review (AFR) reports that UBS is also overweight on energy and mining stocks.
UBS expects the ASX 200 to be back up around the 7,000-point mark by year's end.
At the time of writing, the S&P/ASX 200 Index (ASX: XJO) is up 1.9% to 6,769 points.
