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Strategists pick their top stocks to play rising prices — and say some are ‘extremely cheap’

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The global economy is beset with rising inflation and slowing growth. Here, CNBC Pro sifts through recent research notes to identify strategists’ top stocks in this tricky environment. The U.S. Federal Reserve hiked rates in March for the first time in more than three years, and announced a further 50-basis-point hike earlier this month . It’s the start of what many expect to be an aggressive rate hike cycle this year. Despite the Fed’s intervention, inflation rose again in April , continuing a climb that has pushed consumers to the brink and is threatening economic expansion . UBS says inflation in the U.S has peaked, but warns that stagflationary pressures are likely to persist for far longer. The Swiss investment bank measures stagflation — defined as rising inflation along with slowing growth — when its Stagflation Pressure Index registers a reading above 2.5 for a 12-month period. UBS believes U.S. markets have not priced in stagflation, with S & P 500 indicators factoring in just a 5% probability of stagflation, UBS’ strategists, led by Bhanu Baweja, said on May. 18. The bank’s “Stagflation Protection list” features its “most favored” stocks that combine the lowest sensitivity to the bank’s stagflation pressure indices and the steadiest margins through adverse economic conditions. A slew of consumer stocks made the bank’s list, including Target , Walmart , Costco , Kroger , eBay and Procter & Gamble . Other stocks that made the list include Exxon Mobil and Chevron in the energy sector, Abbott Laboratories , Johnson & Johnson and Pfizer in health care as well as Microsoft in the technology sector. ‘Extremely cheap’ stocks Bernstein, meanwhile, believes it is important for investors to stick with “value” — despite waning earnings support for the stocks. Value stocks are thought to be underappreciated by the market and typically have high dividend yields as well as low price-to-book and price-to-earnings ratios. “We still think it is important to retain some exposure to value despite the list of macro risks as an inflation hedge in a portfolio,” Bernstein’s strategist Sarah McCarthy wrote on May. 17. She noted that value stocks had outperformed in Europe and the U.S. following the release of April’s higher-than-expected U.S consumer price rises earlier this month. “Value stocks are still extremely cheap relative to history, and the valuation spread within the market both in Europe and the US still has ample scope to narrow further,” she said. Read more The Fed doesn’t care about your stock portfolio — at least until inflation calms down Citi downgrades several apparel stocks, including Gap, because of inflation hitting consumers Morgan Stanley sees stocks lower from here one year out, recommends staying defensive The bank favors value stocks with defensive attributes — stocks in defensive sectors that are thought to be recession-proof — amid an outlook of uncertain inflation and slowing growth. Bernstein screened for European stocks with high dividend yields of at least 4%. These stocks also have a track record of maintaining or growing dividends in at least seven of the past 10 years. The screen turned up BP , Deutsche Post , German chemicals firm BASF as well as utility firms ENEL and EDP . All are rated overweight by the bank. Bernstein also tips “quality stocks” to do well as economic growth slows and as a hedge against rising volatility. The bank’s screen for quality stocks turned up luxury goods firms LVMH and Kering , Dutch information services firm Wolters Kluwer , Swedish conglomerate Assa Abloy , mining firm Antofagasta and Italian grid operator Terna .

The U.K.’s Office for National Statistics said its estimates suggest that inflation would have last been higher “sometime around 1982.”
Justin Tallis | Afp | Getty Images

The global economy is beset with rising inflation and slowing growth. Here, CNBC Pro sifts through recent research notes to identify strategists’ top stocks in this tricky environment.

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