UBS House View Monthly

The UBS House View Monthly presents the latest version of the UBS Investment House View, assessing the impact of current economic trends on asset classes and portfolio allocation.

Preparing for the second half

At the start of the year, my inbox was full of questions about Catalonia, Saudi Arabia, and President Donald Trump. Six months on and it’s volatility, Italy, North Korea…and President Trump. (Some of) the narratives may have changed, but the sense of trepidation hasn’t. At half time in the 2018 World Cup of investing, we ask ourselves: What’s working well? What isn’t? And what are our tactics for the second half?

Our overweight position in global equities relative to bonds delivered positive performance. Despite a bumpy first half, at the time of writing, global stocks have returned 1.9%, while our corresponding bond underweights are relative underperformers. Global corporate earnings growth (9% in the first half alone) has been strong enough to boost global equities while higher interest rates weighed on bond prices.

Diversifying our risk across markets gave us a smoother ride than concentrating in local markets (Fig. 1): global equities suffered just two days of greater than 2% drawdowns versus eight days for US stocks, six days for Chinese equities, and 17 days for Brazilian shares. Our allocation to hedge funds supported performance:
the HFRI fund-weighted index is up 1.4% in the first half while helping insulate investors from correlated moves in equities and bonds. And our tactical allocation benefited from the valuation recovery in the British pound, the Japanese yen, and local-currency emerging market (EM) bonds at the start of the year, as well as the good performance of Canadian equities relative to Swiss equities. We are also proud that we warned against “investment” in Bitcoin, which has plunged 53% this year.

We didn’t, however, anticipate the appreciation of the US dollar. The US dollar index has rallied 3.3% this year and 7.4% since a February low, hurting our long EURUSD position and our overweights in EM equities, EM currencies, and EM sovereign bonds. We also lost performance earlier in the year from an overweight in the Swedish krona relative to the Norwegian krone.

Mark Haefele
Global Chief Investment Officer Wealth Management

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