Macro Quarterly Is the noise becoming signal?

In this edition of Macro Quarterly, we review our core views on economic growth stabilization which we believe are being challenged as the US-China trade war has further escalated.

12. Sep. 2019


  • The US-China trade war has now escalated enough that our core views on economic growth stabilization are being challenged.
  • We remain of the view that the US and global economies can avoid recession, but the risks to this view have risen in recent months. The ability of the economy to withstand further shocks is limited.
  • Our key signposts now include US initial jobless claims and consumer confidence.
  • We maintain a cautious stance on global equities and are neutral fixed income. The dollar should weaken as the US economy catches down to the rest of the world and Fed eases policy further.

In Investment Solutions, we take a theme-based approach to our multi-asset portfolios. We set out core views or hypotheses about the global economy and express these via sets of cross-asset trade ideas. Our themes are designed to be orthogonal; they should capture different elements of the global macro and market environment. We have now come to an interesting juncture in which one of our themes, the growing role of geopolitics and protectionism in markets, has become so strong that it is challenging our confidence in a second theme, that global growth will ultimately stabilize around its trend rate. Put simply, the US-China trade war is now a quite legitimate threat to the global and US economic expansion. 

Geopolitics now a primary driver of markets

While geopolitical developments have always played a role in economies and markets, their scale and impact has been steadily rising since the 2008 financial crisis. One way to quantify this is the Global Economic Policy Uncertainty Index, which has reached record highs, and is trending higher (see Exhibit 1 on the next page).

Traditionally, medium- to long-term investors have been able to compartmentalize the 'noise' of geopolitics and focus instead on the 'signal' of underlying economic fundamentals. However, the noise of trade escalation is arguably now the signal. Tariff policy has sent global manufacturing into contraction while business investment has declined sharply. The global economy continues to decelerate and is now quite vulnerable to another shock or miscalculation.

Exhibit 1: Global economic policy uncertainty trending higher

Service sector resilience is key

If there is some good news, it is that developed market economies are much more services-driven than manufacturing-driven versus history. Manufacturing today makes up only about 11% of the US GDP and 8.5% of US employment. And the services sector has, up to now, been rather resilient amid the deterioration in the goods-producing sector (Exhibit 2). But we are beginning to see some cracks in non-manufacturing, as measured by the global services PMI. If these PMIs can stabilize over coming months and specifically the services PMI remain above 50, as it has done in prior mid-cycle slowdowns, then our thesis on economic growth is intact. But risks are rising.

Exhibit 2: Manufacturing dips into contraction territory, while services stay near-trend

Watch the US consumer

The absolute key to whether the global economy can weather this geopolitical storm is the resiliency of the US consumer. As shown in Exhibit 3, the US consumer is about the same size in nominal GDP terms as is China's entire economy.

Exhibit 3: Nominal GDP of major economies

Consumption is a function of labor market incomes, which have decelerated but are in reasonable shape considering population growth and the length of the cycle. The risk scenario is that businesses, challenged by tariffs or other cost pressures, begin to cut back on labor. A rise in unemployment would sap consumer confidence, spending, and ultimately result in a recession.

So is our view that global growth will stabilize now invalid given the uncertain geopolitical environment? The answer for now, is no. We do not see enough evidence to suggest the US labor market or consumer is set to fold. While we look at a number of metrics, we find initial jobless claims a key leading indicator for the labor market and overall economy. Claims remain near historical lows and we would need to see a trend rise before turning more negative on the economy. Likewise, consumer confidence has tended to fall by more than 10% ahead of recessions. It remains near cycle highs—we are watching for deterioration here as well. Global growth stabilization remains the modal view, or base case, although the risks to that view have clearly risen. 

Exhibit 4: Key signpost 1—initial jobless claims near historical lows

Exhibit 5: Key signpost 2—Consumer Confidence remaining steady

Central bank actions can cushion against, but not offset, geopolitical disruption

A key related question is whether the world's central banks, which are now easing almost universally, are doing enough to stave off recession. Certainly, the abrupt shift from developed economy central banks has eased financial conditions, providing a healthy cushion for consumers and businesses.

China's recent announcement of new stimulus measures, designed to increase liquidity and boost infrastructure investment, is also helpful. We think this global monetary easing will be enough to stave off a recession, but the crucial determinant will be if there are further meaningful negative shocks related to trade policy or another catalyst. Central banks do not have the tools to fully offset more pressure on the global trade environment, and its indirect effects on business and consumer confidence.

The bottom line: Asset allocation

Taking into account the rising risks to our base case on growth, we have a neutral outlook on global equities over the next 12 months and in some portfolios are tactically underweight. We are contrarian in our preference for European and Japanese equities relative to the US, as we believe that the former have much more bad news priced in. In fixed income we are also neutral, with a preference for US sovereign debt over that in Europe and Japan, as the Fed has more room to ease in a worsening growth environment. In line with this, we see the next big move in the dollar as lower, given it is overvalued and the US economy is 'catching down' to the rest of the world. We continue to be long the undervalued and safe-haven Yen and underweight the high beta Australian dollar as a hedge against further trade war escalation.

Asset class attractiveness

The chart below shows the views of our Asset Allocation team on overall asset class attractiveness, as well as the relative attractiveness within equities, fixed income and currencies, as of 30 August 2019.

Source: UBS Asset Management Investment Solutions Macro Asset Allocation Strategy team as at 30 August 2019. Views, provided on the basis of a 3-12 month investment horizon, are not necessarily reflective of actual portfolio positioning and are subject to change.

Asset Class

Overall signal

UBS Asset Management’s viewpoint


Global Equities



  • We maintain an overall neutral stance towards global equities after the sharp rebound in valuations year-to-date. On the positive side, we expect global growth to stabilize around its trend rate and do not anticipate a recession over the next 12 months. Meanwhile, monetary policymakers around the world have shifted to a clearly accommodative stance. Nevertheless, we see a lot of good news as priced in already, leaving the market vulnerable to surprises on trade policy, earnings expectations or less dovish tilts from central banks.


US Equities


  • During the first half of the year, US equities benefited from a resilient domestic economy, a lower exposure to global growth factors compared to other major indices, and a more accommodative message from the Fed. However, we believe that the risk-reward compared to other markets has deteriorated as growth concerns begin to feed through to the US economy and risks to the technology sector as a result of geopolitics and regulation start to mount. US equities trade at a historically high premium relative to other markets, suggesting they may underperform over coming quarters.


Ex-US Developed market Equities

Slightly positive

  • In Europe, current headwinds on global trade persist with few signs of an imminent recovery in manufacturing activity. While new elections in Italy are now less likely, some geopolitical uncertainties still linger with the probability of hard Brexit in the UK rising after Boris Johnson assumed the PM position. Together, those factors could hamper the near term performance of European equities. However, our medium-term base case remains positive as the ECB is likely going to implement a comprehensive monetary stimulus program and support for additional fiscal spending is gaining traction – even in Germany. The region as a whole is still exhibiting solid domestic demand dynamics, attractive valuations and could benefit from an eventual stabilization of global economic conditions over the medium term.
  • We remain constructive on Japanese equities despite the near term headwinds from an imminent VAT hike and an escalating trade conflict with South Korea. Fiscal measures taking effect in the aftermath of the tax hike should soften the spending slowdown and Tokyo business investment is likely going to accelerate as we move closer to the 2020 Summer Olympics.


Emerging Markets (EM) Equities


  • Emerging market equities continue to underperform developed market equities driven by ongoing deterioration in earnings and a lingering of the US-China trade war. While the rise in Chinese social financing bodes well for EM growth eventually, the recently raised tariffs likely prevent regional trade from rebounding aggressively until resolved.


China Equities

Slightly positive

  • We remain positive on China as policy measures continue to provide a cushion the economy. Any broadening of the current trade standoff with the US is likely to hamper Chinese growth, but Chinese authorities have shown themselves willing and able to provide additional monetary, fiscal and regulatory support to help smooth ongoing developments. Chinese equities still trade at a small PE discount to other markets and further market liberalization could prompt a re-rating. International capital should increasingly flow into Chinese assets following the inclusion of onshore Chinese equities in MSCI's widely followed EM equity indices.


Global Duration


  • Global central banks have almost universally moved in the direction of accommodation this year together contributing to much lower bond yields. Moreover, heightened US-China trade tensions amid a still vulnerable global economy have driven a flight to safety in sovereign bonds. These heightened risks will continue to weigh on sovereign bond yields, but as long as the economy does not turn, credit and EM should continue to perform.


US Bonds
Short end
Long end



  • With the Fed's rather abrupt dovish shift towards risk management, nominal US Treasury yields have dropped significantly. We still expect the Fed to deliver some further accommodation although perhaps not as much as is currently priced. Hence, our assessment of the short-end of the US curve is neutral. The scarcity of positive yielding safe assets will continue to drive flows into US Treasuries, keeping term premiums significantly negative.


Developed-market Bonds


  • In aggregate, we see ex- US developed market sovereign bonds as unattractive. The ECB and BoJ have committed to low rates for some time, limiting attractiveness of these markets. We find Italian BTPs attractive on diminishing political risks.
  • Elsewhere we were more positive on Australian duration on a relative basis. However, 150bp rally in Australian bond yields since November 2018 makes us neutral on the current rates.


US Investment Grade (IG)
Corporate Debt


  • Given the significantly increased fraction of global fixed income markets which now has negative yield, US IG is more attractive in relative terms. We do not have a recession as our base case and therefore think IG debt will remain bid.
  • That said, we acknowledge high levels of corporate debt and the potentially large number of "fallen angels" when economic growth slows down significantly and downgrades begin.

US High Yield Bonds


  • Current default rates in high yield are very low by historical standards. Given the still relatively positive economic backdrop and accommodative Fed, we do not expect a material pickup in US defaults in the near-term.

Emerging Markets Debt
US dollar
Local currency

Slightly positive

  • Spreads on EM debt, both hard currency and local currency, relative to US Treasuries widened substantially in 2018 in the face of higher geopolitical risks, a strengthening USD and higher USD funding rates. However, this year both hard currency and local currency EM yields have rallied together with Treasuries. The valuation case for EM rates is now much weaker than it was last year but the current environment of dovish central banks and low volatility should support EMFX and, hence, EM local currency bonds in the coming months.

Chinese Bonds


  • Chinese bonds have the highest nominal yields among the 10 largest fixed income markets globally and have delivered the highest risk-adjusted returns of this group over the last 5 and 10 years. Slowing economic growth and scheduled and planned inclusions to global bond market indices in coming years should continue to push yields down during the next 3-12 months.



  • The USD has been stubbornly strong, but we see the next big move as lower. The USD is overvalued on a real trade-weighted basis. Meanwhile, US economic growth is moderating and the Fed is easing. Over time, we anticipate economies outside of the US will stabilize and investment capital will seek out opportunities in those countries, sending the dollar weaker. Elsewhere, we continue to see strong valuation support for the JPY and see short AUD as an effective hedge against ongoing China weakness in an economy where domestic household leverage is likely to constrain growth.

Source: UBS Asset Management. As of 30 August 2019. Views, provided on the basis of a 3-12 month investment horizon, are not necessarily reflective of actual portfolio positioning and are subject to change.

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