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.
The Galton Board
Just a few minutes’ drive from President Trump’s boyhood home is the New York Hall of Science. The museum houses one of the world’s largest Galton Boards. A Galton Board is made up of rows and rows of obstacles, onto which a ball is dropped from a single point at the top. When a ball hits each obstacle it has a 50:50 chance of falling left or right, and after bouncing its way to the bottom, it lands in one of a number of pots (see Fig. 1).
Much of the media coverage of President Trump’s protectionist policies has made them seem like a game of Russian roulette, with no upside, and a meaningful risk of major downside. But we believe that the Galton board is a more apt analogy at this time: the protectionist ball has just dropped, and the outcome will only be determined after dozens and dozens of uncertainties have been resolved.
If Gary Cohn, the President’s former chief economic adviser can be surprised by policy changes being made in the next room, we consider the final outcome of US trade policy changes unknowable at this time. But while we are keenly focused on not underestimating the damage of a possible trade war, we believe it is simply too early to brace for an extreme bad outcome to US trade policy changes, and positive outcomes are not impossible. For the moment, economic factors like global growth and corporate earnings provide more valuable information for investors.
In the past month, growth has remained robust, the Fed has signalled that rate hikes will be gradual, and with that the threat of rapidly rising bond yields has cooled. We therefore have a pro-risk stance, are overweight global and emerging market equities, and have a regional preference for Eurozone stocks within Europe.
Yet the presence of heightened political uncertainty means we need to manage against downside risk. Doing this in a time of strong global growth is difficult, because the very positions that could be expected to perform well in our base case (e.g. our Canadian dollar, EM, and Eurozone positions) are also those which could be vulnerable in the event of a trade war.
Global Chief Investment Officer Wealth Management
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