Moderate overweight preference for risk assets, including equities and corporate credit

Given that global equities have neared new highs and returned close to 100% in just the last five years, many investors are not convinced that strong gains can continue given higher valuations and an uneven global economic recovery. However, with valuations still fair, a fed more likely to ease policy, and potential cash flows from the “sidelines” to the markets, there is still room for equity market gains to grow, according to the Chief Investment Office Wealth Management Research (CIO WMR) in the latest UBS House View: The facts, the Fed and the flows (PDF, 3 MB).  

Equity valuations still fair

While equity markets are reaching near new highs, valuations are still not extreme. In fact, price-to-earnings metrics for the S&P 500 and the Euro Stoxx 50® are at near average, not peak, levels. Given this backdrop, CIO WMR believes that equity valuations remain broadly fair and expects markets will deliver annual price returns in line with earnings growth of 7%–8%.

Central banks to remain accommodative
Based on statements from fed Chair Janet Yellen, CIO WMR believes the fed is likely to err on the side of loose monetary policy, even if it results in longer-term price and wage inflation. Beyond the U.S., the European Central Bank (ECB) has been notable for its evolution. President Mario Draghi’s statement that “QE (Quantitative Easing) falls squarely in our mandate” clearly signaled a new openness to a QE program that is surprisingly now on the table. Taken together, CIO WMR believes a looser monetary policy globally will support both equities and credit.

Cash flows remain strong
Another reason CIO WMR sees room for further performance for equities and credit, is because of the generous levels of cash that clients and corporations have ready to deploy. In fact, almost 30% of the money booked with UBS in Switzerland currently sits in cash. Among corporations, cash comprised 11.4% of S&P 500 companies’ total assets at the end of 2013, the highest level since before the turn of the new millennium.

What should investors do?
Against this backdrop, CIO WMR recommends a strategic asset allocation invested mostly in financial assets that is well-diversified, and where cash does not play an overly important role in portfolios. They are tactically overweight credit and equities, with a preference for U.S. assets and Canadian equities. On the currency front, CIO WMR is underweighting the Swiss franc and overweighting the British pound and the U.S. dollar.

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, September 4, 2014
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*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.