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.
During the recent US Presidential visit to London, I was stuck in traffic that seemed to be the “highest level of special.” I asked my taxi driver if this was caused by construction, tourism, or the city taking to the streets for an event. The sardonic reply came: “Construction, tourism, Brexit, Trump — take your pick today, sir.” For me, that traffic jam encapsulated a lot of the good and the bad impacting global markets. Yes, earnings and economic growth on the whole are strong,* but political issues are so often in view.
We have profited in recent years by keeping our investment focus on economic reality rather than political headlines. The biggest economic news over the past month has been the strong jobs report in the US, which has helped propel US equities to a six-month high. Yet, the Trump administration is now taking the trade dispute beyond rhetoric. The US has implemented a 25% tariff on the first USD 34bn of Chinese goods (of a scheduled USD 50bn), and is on course to add a 10% tariff on an additional USD 200bn.
It is not certain whether further tariffs will be implemented, and, with economic growth strong, equity markets have fundamentals on their side. But markets have moved higher while the downside risk around tariffs has increased. We are concerned that markets are, at most, pricing in first-order impacts of the tariffs that are about to go into effect. Investors are not currently pricing in the possibility of larger second-order impacts, such as supply chain disruptions, reduced hiring, lower investment, or a further escalation in the conflict. To reflect this risk and to take advantage of the recent move higher in equities, we reduce the size of our overweight position in global equities in our tactical asset allocation this month. We are left with a broadly neutral exposure to global risky assets, comprising small overweight positions in global equities and in emerging market sovereign debt, and an underweight in euro high yield credit.
In the remainder of this letter, I explain 1) why we believe markets may be underestimating the tariff threat; 2) what we will be watching to judge the right time to refocus on strong fundamentals and reassert a larger overweight; and 3) how investors can position their portfolios for growth while limiting risk.
Global Chief Investment Officer Wealth Management
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