Be selective within emerging markets, maintain strong positions in U.S. equities and the U.S. dollar.
Recent volatility in global equities can seem more than a little unsettling for investors. Unless, according to the Chief Investment Office Wealth Management Research (CIO WMR), you understand the broader context as presented in the latest UBS House View: The struggle for context .
Not all emerging markets are created equal
When looking at emerging markets (EMs), it’s important to see them in three distinct buckets. The first includes more “resilient” regions, including China due to its large scale and insulated financial dynamics. The second group includes smaller, independent EMs such as Mexico, Russia and Korea. Third, there are the more “fragile” EMs that depend heavily on foreign financing and credit, including India, Indonesia, Turkey, Brazil and South Africa. The epicenter of the current volatility has remained within this latter group.
As an investor, it’s important to know which areas hold the most promise and which hold the most pitfalls by assessing their level of account deficits, degree of integration, commitment to reform and resilience to capital outflows. CIO WMR remains neutral on EMs as a whole, but prefers the independence and strength of equities in Mexico, Korea, Russia and China. When it comes to EMs to avoid, CIO WMR sees the lack of adequate foreign exchange reserves of Turkey and South Africa as making them vulnerable.
The U.S.—an uneven start in 2014 yet fundamentals remain strong
Despite volatility triggered by recent negative U.S. economic data, such as the January manufacturing ISM decline to 51.3 as well as disappointing non-farm payroll reports, CIO WMR sees the overall trend of U.S. growth as positive. In the U.S., fiscal drag is fading, the housing market continues to improve and there is a moderate growth in private consumption. Thus, CIO WMR continues to overweight U.S. and eurozone equities relative to government bonds. And given the backdrop of the Fed’s likelihood of maintaining its tapering path under Janet Yellen, CIO WMR is adding to its favorable position in the U.S. dollar relative to the euro.
To understand more about how these trends may impact your individual investments and strategy for the year, connect with your UBS Financial Advisor or find a UBS Financial Advisor.
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