Outlook 2016 European equities are attractive

Equities, interest rates, terrorist attacks: Daniel Kalt, UBS Chief Economist Switzerland, reveals the dangers that lie in wait.

by Stephan Lehmann-Maldonado 20 Jan 2016
Daniel Kalt, UBS Chief Economist Switzerland and Chief Investment Officer Switzerland believes the world’s economy is shaped by imbalances.

Is it still worth entering the stock markets at this time?

The stock markets have been in an uptrend since 2009. To jump on the bandwagon now is a bit like not turning up to a party until 10.30 in the evening – will the fun go on until midnight or six in the morning? Many investors are currently afraid of interest rate hikes. Yet in the last economic cycle, the Americans began raising interest rates in 2004: the share markets then went on to post gains for the next three-and-a-half years. Even now, equities could still continue to climb for some time to come. But a slump in prices cannot entirely be ruled out either.

What is the best way to invest money at present?

A staggered approach – investing part of the overall amount every month or every six months, for example – is the only strategy that can help avoid getting the timing wrong.

Where do you currently see return opportunities?

European equities offer the best prospects. They are sensibly valued and the euro is very weak, which stimulates exports. In addition, the European economy is recovering. We expect to see earnings growth of 8 to 10 percent in the eurozone. We are neutral on the USA and Switzerland, and recently reduced the exposure of emerging markets equities in the portfolios slightly.

What risks are threatening our financial markets?

Globally, the situation remains highly unstable at a number of different levels. The industrial nations are posting solid growth. While supporting consumption, the massive collapse in oil prices also creates geopolitical tensions, as we are seeing in the Middle East. The market interventions in China have also startled the financial world – however, we expect economic momentum in the emerging markets to gradually stabilize.

What could trigger a crisis?

The global economy is still shaped by imbalances and as long as the central banks continue to pump money into the markets that is likely to remain the case. What could bring the house of cards tumbling down? Maybe a sudden shock change in central bank policy or a warlike event. While we’re not expecting it to happen, it’s impossible to forecast exactly whether and when something like that might occur.

The US Federal Reserve has raised interest rates. What does this mean for the Swiss economy?

Paradoxically, Switzerland stands to benefit from the interest rate hike. If the Americans proceed cautiously along this path, at some point interest rates in Europe will also slowly start to climb, which would make life somewhat easier for the Swiss National Bank. If the Americans don’t succeed in lifting interest rates again in the next six to 12 months, that would be a negative signal. A rate increase in the USA means that its economy and labor market are in good shape.

How is mortgage interest developing in Switzerland?

We need to face the fact that the three-month Libor rate will remain in negative territory for a long time yet. The European Central Bank will keep interest rates extremely low for some time to come through its bond-buying program. That will increase the pressure on the Swiss National Bank. I don’t see much chance of the SNB taking steps to raise interest again before the end of 2017.

Let’s assume you only have 100 francs left. What would you invest it in?

(Laughs) In a good bottle of wine – or Nestlé shares. Because we always have to eat and drink.

Investing in Switzerland

What prospects do investors face in Switzerland in 2016?

  • With government bonds posting significantly negative returns, it will be difficult to achieve sensible yields in this asset class.
  • The UBS CIO weights the Swiss equity market neutrally, preferring to focus on the markets in the Eurozone and Japan.
  • Within the Swiss equity market, mid caps should perform best, having already outstripped the overall market in 2015.
  • High quality dividend payers with defensive characteristics could pose an alternative to bonds.  

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