Global financial services firm UBS suggests that the recent rebound in equity markets likely isn’t sustainable, and it is calling for a counterpunching strategy as the economy limps along.

“The predominant investor mood we sense is that better-than-expected news only defers the inevitable slowing in growth and, for some, suggests it will be even more severe,” UBS says in a new report from strategist George Vasic. “In any event, we still look for rising inflation pressures to boost bond yields, capping upside. Accordingly, while return expectations are low and valuations moderate, it seems unlikely that sentiment will get carried away.”

“We believe the appropriate strategy in these circumstances is for investors to maintain a moderately upward bias, while counterpunching the range as we go along,” it says. “Just as last month’s sub-9,300 level was a buying opportunity, potential returns are not attractive at TSX levels of 9,800-10,000, and would be the time to take a more defensive tack.”

In the current climate, UBS believes, “Investors are more likely to embrace disappointing news since it supports their medium-term view, but have an only limited inclination to “pay up” for better than expected news since it is seen as transitory.” And, it counsels that the only practical way investors can play this “is to counterpunch what we believe is still a moderately rising range for equities.”

“These are not markets that will reward perma-bulls or perma-bears,” it suggests. UBS reports that its comprehensive measure of valuations, which relates price-to-book multiples to ROEs and corporate bond yields, “puts valuations roughly in the middle of the range in the wake of the recent market rebound. With profitability ratios very high, book values should continue to grow 4% to 7% per year and provide a gradually rising trend to the market. In the short run, however, oscillating trends in the data that can move the market to either end of the valuation range will likely be a larger source of variation.”

This counterpunching strategy applies to the sector mix as well, it notes, “moving from more offensive to defensive areas as market valuations dictate.” Currently, it’s overweight on materials, industrials, consumer discretionary, and tech; neutral on financials and health care; and underweight energy, consumer staples, telecom and utilities.