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CIO Year Ahead: Positioning portfolios for 2013
Investors should increase their portfolio holdings of investment grade corporate, emerging market and high-yield bonds in 2013, according to advice from the Chief Investment Office of UBS WM in its CIO Year Ahead report. The global economy will continue to improve, albeit at a sub-trend pace, with global growth rising to around 3.0% in the coming year. Equities are attractively valued, and longer-term opportunities can be found particularly in Europe, but also in emerging markets.
Surveying the opportunities and risks facing investors in 2013, the Chief Investment Office of UBS Wealth Management expects the global economy to continue to improve, albeit at a sub-trend pace, with growth rising to around 3.0% in 2013 from 2.5% in 2012. Growth in emerging markets should be supported by an expanding middle class and increasing consumption, and better fiscal profiles than in the developed world. CIO-preferred-investment themes offer investors exposure to such trends: for equity investors, "Western winners from emerging markets growth" focuses on one such opportunity, as does "The case for an underappreciated asset class" for emerging market currency investors.
In bonds, the CIO recommends reducing holdings of developed countries' government bonds as their yields have fallen to historical lows and are likely to move gradually higher in coming years. US 10-year bond yields are forecast to rise to 2.3% over the next 12 months, implying slightly negative returns. The CIO sees better opportunities in investment grade corporate, emerging market and high-yield bonds.
Turning to equities, CIO strategists believe that investors' cautious sentiment toward markets is creating longer-term opportunities. Generous risk premiums mean that investors willing to hold equities over a two to three year period should be rewarded, with an estimated 25-30% upside to fair valuation in US equities based on cyclically adjusted earnings yields. European and emerging market equities look even more attractive on this measure.
In the CIO Year Ahead, readers will find asset class recommendations that are explained in a portfolio context. The UBS House View, created by the CIO, recommends that an investor’s portfolio be optimally diversified. Investors will find a section devoted to every major asset class and the publication contains clear statements about the return potential of, and the risks attached to, each asset class over the coming years.
The last section of the publication discusses "Risks and Scenarios." Positive and negative scenarios, and estimates of the probability of each occurring within three economic regions - the US, Europe and China - are presented. It also examines special factors, such as the Swiss franc floor to the euro, global weather disruptions, and any escalation of armed conflict in the Middle East.
In all, the CIO Year Ahead offers insights into the economic outlook, and serves as a concise investor guidebook for seizing the coming year's investment opportunities while staying clear of its more acute risks.