Share prices have risen sharply in recent years. Are we headed for yet another crash?
Philippe G. Müller: No. The economy is recovering all over the world, the monetary policies of the central banks are very expansive and U.S. corporate earnings are rising solidly. In the eurozone profits are hovering at very low levels as the recession was overcome only last year. Profits in Europe continue to provide upside potential. That is why we believe share prices will be supported for a time frame of six months and we expect further price increases. But we do not rule out temporary, short-term market losses of 5 to 10 percent – as we have seen at the beginning of the year.
How reliable are your economic forecasts?
Philippe G. Müller: It’s similar to the weather: The more short-term the forecast is, the easier it is and the more likely it will turn out to be right. PMIs for example, are fairly reliable leading indicators for the economy. Looking back we have been very accurate with our forecasts since the beginning of 2013. Forecasts should rather be understood as general direction forecasts that will emerge within in a certain range – and not as an exact prediction of the future.
And what if an unexpected event puts a wrench in the works?
Philippe G. Müller: Our forecasts are based on assumptions And these don’t always pan out. It’s very important for us to think in different scenarios. We try to take into account both negative and positive scenarios – as well as unexpected events – in order not to be caught off guard. We build our investment strategy using the scenario that we consider to be the most likely. So even if we should be surprised by events, we should be in a position to adjust our strategy rapidly because we have thought of alternative scenarios. By the way, we also communicate our scenarios publicly.
Still, isn’t there always a blind spot, something we don’t manage to see?
Philippe G. Müller: We have experts around the globe who are taking the pulse of the markets. Still, we recognize we don’t have a complete view. To discover our own blind spots we always include very well-known external investment specialists, experts, and people who think out of the box as a permanent fixture of our investment process. And we subject our investment strategy to a stress test. We benefit from our network – and our good reputation among experts.
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