Maintain overweight in U.S. equities; reduce Eurozone equities to neutral and overweight high-yield corporate bonds

The last month hasn’t been the smoothest for financial markets, with equity volatility rising, government bond yields falling and some credit funds seeing large redemptions. However, if investors look at the markets through the right lens of “OODA”— observe, orient, decide and act—they may have more clarity and perspective to inform their investment strategy, according to the Chief Investment Office Wealth Management Research (CIO WMR) in the latest UBS House View: The right lens for clarity (PDF, 3 MB).  

Observe what the markets are doing
Despite volatility, the global outlook, economic data and corporate earnings are still valuable barometers in decision-making. The U.S. economy continues to expand with rising manufacturing numbers, positive GDP growth at 4.0% and more than 200,000 jobs added in the month. The Eurozone, however, looks more negative where the region’s three largest economies—Germany, France and Italy—failed to grow in the second quarter.
Orient your observations within a wider context
While global equities were down 4.0% and U.S. high-yield credit fell 2.0%, both have since recovered. Global equities are now down 1.5% from their peak and high-yield credit is down 0.3%. And while it’s important to stay vigilant of geopolitical risks, including within Ukraine and Iraq, overreacting can lead investors to miss out on larger opportunities, such as in the U.S.—the world’s largest economy—where growth remains on track.
Decide and act—avoiding pitfalls and seizing opportunities
With valuations recovering to similar levels as last month, CIO WMR believes that valuations are still not stretched. And with oil prices stable, they believe that the global economy is not currently facing a significant drag due to recent geopolitical events. Finally, positive economic data from the U.S. broadly outweighs the negatives from the Eurozone and the mixed economic data out of China.
What should investors do?
Given this backdrop, CIO WMR has shifted its overweight in Eurozone equities into U.S. and Canadian equities, and maintains an overweight on high-yield corporate bonds v.s. Treasuries and emerging market bonds. It also believes that the Fed’s flexibility in changing monetary conditions means that asset prices should continue to serve as a tailwind to the economy because of either Fed policy decisions or U.S. economic expansion.

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.

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