Global economic conditions will change next year and which markets and sectors are underperforming will change, according to the chief strategist at investment bank UBS. Bhanu Baweja told CNBC’s “Squawk Box Europe” on Wednesday that one-third to one-half of the countries the bank covers globally are facing recession. “It’s an inch deep, but it’s a mile wide,” he said of the expected recession. “Global growth is 2% and that’s not factoring into stocks.” UBS expects November’s US consumer price index, which excludes volatile food and energy costs, to come in below 0.3% for the month. As such, Baweja said market expectations for a restrictive Federal Reserve will ease somewhat, which will help companies’ price-to-earnings ratios. Earlier this month, lower-than-expected October inflation fueled a cautious market recovery. Baweja pointed to the S&P 500’s underperformance so far this year, down 15.5%, compared with Europe’s Stoxx 600 down 9.6%. “That’s because it was an appreciation year, it was a year where your risk-free rate, your real interest rate, your two-year real rate moved 500 basis points. So it was a downgrade year,” he said. . But profits will be the issue next year, Baweja said, especially given the headwinds from the recession. He expects stock returns next year to be “fairly flat” given the competition from high bond yields, but sees US stocks outperforming European ones. “Life is not zeros, ones and black and white, but if most of the problems in the next year will be [earnings], then Europe is more at risk than the US,” Baweja said. The reversal will also be seen across sectors, he predicted. “Because we’ve had so much pressure on commodities, Covid, fiscal largesse… a lot of commodity cyclicals have done exceptionally well – materials and energy. These are the sectors that most people would consider cyclical, they’re the sectors that have done extremely well and that’s why the cyclicality has stayed so high,” he said, referring to financial stocks with solid balance sheets. But he stressed that a number of factors will change as you move toward global growth near 2%, “which is as close to a recession as you can get.” “Next year, I think it’s going to be much more defensive than cyclical, so your classic utilities, technology, potentially healthcare, those are likely to do much better and even some consumers are likely to do much better than the production side of the economy which is materials and industry,” Baweja added.