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UBS Global Asset Management: All eyes still on central banks for driving asset class returns
Many investors see a favorable outlook ahead, but will the bears crash Goldilocks' party?
The UBS Global Asset Management Cyclical Market Forum, held quarterly to discuss three plausible economic scenarios and their potential implications for investments over the next 12 months, found its 4Q13 Forum dominated by discussion over the continued effects of central bank activity on asset prices. While most of the participants had a positive outlook for risk assets in 2014, there was debate about whether there was too much optimism for the year ahead. Curt Custard, the chair of the Forum, said, “My big worry is that markets have not priced in the chances of a policy error, which is a very real threat."
Three market scenarios are proposed at each Cyclical Market Forum and are debated by UBS Global Asset Management (UBS) investment teams managing approximately USD 642 billion globally, as of September 30, 2013. Participants included investment teams covering equities, fixed income, multi-asset portfolios, hedge funds, currencies, commodities and real estate.
UBS Cyclical Market Forum 4Q13 Economic Scenarios Under Consideration
- Scenario 1 –"The song remains the same" – represents a consensus scenario, in which global growth remains modest, while inflation remains subdued. The world remains in low gear, with industrialized countries closer to their trend growth and emerging countries lagging their (higher) trend growth rates. This scenario is supportive for most global asset classes, as growth is low enough to maintain accommodative policy in many regions, but high enough to continue recovery from the financial crisis.
- Scenario 2 – "The party gets going" – represents the most bullish scenario, in which growth is closer to historical trends for all industrialized countries except for the eurozone. Emerging countries take advantage of the ensuing export opportunities, but still grow below the speeds experienced in the last 20 years. The US and Japan are the stars of this growth episode, which gradually allows peripheral European countries to get back on their feet, thanks to more supportive monetary policies. This scenario is strongly positive for developed and emerging markets equities, while fixed income in developed markets would likely produce negative total returns.
- Scenario 3 – "European policy mistakes spoil the party" – represents the most bearish scenario, in which actions by the European Central Bank (ECB) or other institutions lead to a return to recession in Europe, where inflation falls close to zero. The effects of a slowdown in Europe spill over to other regions, leading to negative returns for both developed and emerging markets equities, and mixed results for fixed income and alternative asset classes.
A majority of the Cyclical Market Forum participants voted Scenario 1 as the most likely. The bullish Scenario 2 was voted as the second-most likely, while the bearish Scenario 3 was seen as the least likely outcome. In terms of asset class expectations, a clear majority of participants expect developed markets to outperform emerging markets in equities and in currencies, while emerging markets debt was expected to outperform developed market bonds. The participants agreed that the outcomes for most asset classes would be significantly impacted by the actions of central banks, particularly the US Federal Reserve (Fed), the European Central Bank (ECB) and the Bank of Japan (BoJ), which are all on different trajectories in terms of tightening or expanding accommodative policies.
Key Takeaways from the Forum:
Curt Custard, Head of Global Investment Solutions, Chair of the Cyclical Market Forum (Chicago)
"In the US, we've been in a bit of a Goldilocks period, with enough growth to keep up market momentum, but not too much to warrant an end to historic accommodative monetary policy. That balance has been supportive for risk markets for quite some time, but it's unclear how much longer that dynamic can continue. Investors across the globe seem almost too sanguine right now, which is concerning. Although the chances of a policy error in Europe are not significant, that potential outcome could cause a disruption in a range of equity and fixed income markets."
Joshua McCallum, Senior Economist, Fixed Income (London)
"I'm more optimistic for the year ahead, largely based on my view of the US. I believe there will be significantly higher GDP growth in the US than expected. When you suggest a GDP growth number that begins with a 3, or even a quarter beginning with a 4, they think you're being wildly optimistic. But historically, at this stage of the economic cycle, those numbers are actually quite awful."
Michele Gambera, Head of Quantitative Analysis, Global Investment Solutions (Chicago)
"I see two major issues right now – one that is visible and one that many may not have been noticed. The first issue is the risk of too low inflation in developed countries, and particularly in the eurozone. Moderately increased inflation could help with deleveraging by reducing the real burden of debt, while the risk is that more austerity could lead to deflation and further economic contraction. The second issue is progress on a European banking union, which has received less media attention. If a banking union agreement is reached, it could thaw bank lending and lead to growth in Europe and beyond."
Comments on Specific Asset Classes:
Tom Digenan, Head of US Equities (Chicago)
"My main worry is the state of the global economy, particularly the threat of a potential slowdown in Europe. The market has priced in that everything in Europe will be fine, and I'm not sure that's a foregone conclusion. As we saw in the spring of 2012, problems in Europe had a considerable impact on the US market. But overall, the US equity market seems to be priced at about fair value. From a bottom-up perspective and in a historical context, we still see a lot of opportunities in US equities."
Scott Dolan, Co-Head of US Multi-Sector Fixed Income (Chicago)
"We believe that 2013 will likely signal the beginning of the interest rate regime shift in the US and will mark the transition from a very accommodative Fed to an era of gradual policy tightening. A wide range of data has surprised on the upside, and while that portends good things for the US economy, I worry about the implications for fixed income markets. Specifically, if the economic data gets much stronger and leads to higher rates, we could see a disruption in the spread markets as well. That type of a 'perfect storm' in fixed income markets is a concern, particularly in a world of few true risk-free assets."
Elisabeth Troni, Global Real Estate Strategist (London)
“People may be underestimating risks. There's still a lot of deleveraging to go in the US public sector, as well as a lot of uncertainties in terms of regulation and the implementation of Obamacare. In the real estate market, we've seen significant inflows from investors allocating from their fixed income budgets. These investors are seeking yield and worried about rising rates, but they're not yet ready to allocate to equities."
Megan Stinson, +1 212-713-1302 firstname.lastname@example.org
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About UBS Global Management
UBS Global Asset Management is a large-scale asset manager with well-diversified businesses across regions, capabilities and distribution channels. It offers investment capabilities and investment styles across all major traditional and alternative asset classes. These include equity, fixed income, currency, hedge fund, real estate, infrastructure and private equity investment capabilities that can also be combined into multi-asset strategies. The Fund Services unit provides professional services including legal fund set-up, accounting and reporting for traditional investment funds and alternative funds.
Invested assets worldwide totalled some CHF 580 billion (EUR 475 billion, GBP 396 billion, USD 642 billion) at 30 September 2013. The firm is a leading fund house in Europe, the largest mutual fund manager in Switzerland and one of the largest fund of hedge funds and real estate investment managers in the world.
With around 3,800 employees, located in 24 countries, we are a truly global firm. Our principal offices are in London, Chicago, Frankfurt, Hartford, Hong Kong, New York, Paris, Singapore, Sydney, Tokyo and Zurich.
The information and opinions contained herein are a reflection of UBS Global Asset Management’s best judgment based on current market assumptions and are considered forward-looking statements. Any obligation to update or alter forward-looking statement as a result of new information, future events, or otherwise is disclaimed. There is no assurance that these projections will ultimately be realized. Actual future results may prove to be different from expectations.
About the Cyclical Market Forum
Assessing the economic and market environment is a key part of UBS Global Asset Management’s investment strategy-setting process across all investment areas. Our Cyclical Market Forum, open to representatives of all investment teams, regularly debates important economic and market themes and their potential impact on our investment strategies. The Forum’s purpose is to examine the main economic and market drivers – typically through scenario analysis over a 12- to 18-month time horizon – and to foster debate between the teams managing different asset classes. The three economic scenarios discussed should not be considered forecasts.
The way in which the output from the Forum is used varies across UBS Global Asset Management’s investment teams and it is just one of a number of inputs into each team’s investment process. One of the key benefits of the Cyclical Market Forum is the opportunity to exchange research and viewpoints from the various investment specialists and to examine the intersection between top-down and bottom-up drivers. As such, it broadens the input into our strategy-setting process in a structured format.