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.

Seeking direction

Year to date, global equities have finished 17 trading days with a move of greater than 1% up or down, compared with just three in all of 2017. Yet, having traded within a 10% range, they are roughly flat on the year at the time of writing (Fig. 1). Behind this volatile and directionless trading pattern are at least three areas of heightened uncertainty: geopolitics, trade, and interest rates.

At question is the direction markets take from here. Over our six-month investment horizon we think the most likely answer is that equities outperform government bonds, and advance. But the present uncertainty shouldn’t be ignored, so we also need to prepare portfolios for the possibility that we are wrong.

In this letter I go through: a) why we think equities can move higher, b) how markets might behave if we are wrong, and how we are preparing portfolios for this possibility, and c) how we are thinking about the challenge of making money in the interim, while more volatile markets seek direction.

In short, our base case is that investor focus will shift back to economic growth as some of the current uncertainties ease. In our base case we do not expect current tensions between NATO and Russia to escalate further than issues in the past, such as Crimea, and expect the trade dispute between the US and China to be negotiated without escalating to a trade war. And our view is that central banks are not likely to raise interest rates rapidly while inflation remains moderate. Given this base case, and with economic fundamentals still good, we overweight global and emerging market equities relative to government bonds.

We prepare for the possibility we are wrong by holding counter-cyclical positions, including an overweight in US 10-year Treasuries. In our FX strategy, we overweight the Japanese yen vs the New Zealand dollar. And for investors who can hold options, we also recommend considering a small allocation to a put protection strategy linked to the S&P 500. We diversify these positions because how we might be wrong is almost as important as whether we are wrong at all.

Mark Haefele
Global Chief Investment Officer Wealth Management

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