Overweight risk assets—U.S. and Eurozone equities; recommend U.S. high-yield credit

Mike Ryan, CFA, Chief Investment Strategist, UBS Wealth Management Americas
Regional Chief Investment Officer for Wealth Management U.S.

While unexpected events so far in 2014 have included a first-quarter contraction in the U.S. economy, slower than expected Chinese growth and a rally in government bonds, overall global growth remains on course to be 3% through the end of 2014, according to the Chief Investment Office Wealth Management Research (CIO WMR) in the latest UBS House View: Teaming up to perform (PDF, 3 MB).  

A few surprises
Although the U.S. experienced a surprising 2.9% contraction in economic output in the first quarter, CIO WMR believes growth will return in the second half of the year, albeit at a slightly lower rate of 2.5% rather than the 3.0% originally projected. And, although China’s growth unexpectedly slowed due to a weakening property market, CIO WMR is still forecasting Chinese growth of 7.3%—down from the original projection of 7.7%.

Global growth remains on track
The biggest surprise, however, remains the relative lack of surprises. Global equities are up 6.4%, credit spreads have contracted and the euro has begun to depreciate against the U.S. dollar. Given this backdrop, CIO WMR expects equity markets to deliver 7% – 8% per annum, high-yield credit 4% – 5% per annum and government and related bonds 0% – 3% per annum.

What should investors do?
A desire for higher returns in this environment should not lure investors into taking more risk than they can bear. CIO WMR recommends investors avoid 1) leaving little margin for unexpected events; 2) not diversifying properly; and 3) taking on excess leverage. In fact, with potential choppier markets expected, diversification is critical to mitigating idiosyncratic risks and improving the risk/return profile of portfolios.

Equities
In the second half of 2014, CIO WMR recommends risk assets, and within equities, prefers U.S. and Eurozone stocks, forecasting the potential for mid-to-high single-digit percentage earnings growth in the U.S. economy and high single-digit percentage earnings growth in the Eurozone.

Currencies and credit
Among currencies, CIO WMR removed an underweight position in the Japanese yen relative to the U.S. dollar, and believes the chance of the yen declining markedly in the months ahead has been reduced. CIO WMR continues to recommend a prudent overweight allocation to U.S. high-yield credit. In fixed income, CIO WMR also reduces its preference to underweight in emerging market hard currency government bond holdings, due to deteriorating fundamentals among major emerging markets borrowers including Brazil, Russia and Venezuela.

To understand more about how these trends may impact your individual investments and strategy, connect with your UBS Financial Advisor or find a Financial Advisor.

UBS House View Monthly Call*

Join us as Mike Ryan, Chief Investment Strategist for Wealth Management Americas, leads this fully interactive discussion featuring the latest on our market views and investment strategy guidance on the first Thursday of every month at 1:00 p.m., ET / 10:00 a.m., PT

Next call: Thursday, August 7, 2014
U.S. dial in: 1-855-827-6587 (1-855-UBS-MKTS)
Verbal passcode: MARKET

Listen to the replay from our July 10, 2014 call:

Dial in: 1-888-203-1112
Passcode: 6180049

*The views expressed on the call do not constitute a personal recommendation or take into account the particular investment objectives, investment strategies, financial situation and needs of any specific individuals. They are based on numerous assumptions. Different assumptions could result in materially different results. We recommend that you obtain financial and/or tax advice as to the implications (including tax) prior to investing.