Preparing for the second half

Looking back: First half by the numbers

At the start of the year, our inboxes were full of questions about Bitcoin, Catalonia, Saudi Arabia and US President Donald Trump. Six months in and questions now focus on volatility, Italy, Korea…and President Trump.

The mid-point of the year is a time when many investors look back to assess first-half performance: what worked well, what didn’t, and what to do now. So far stocks have continued to outperform bonds as the normalization of central bank policy has hurt fixed income, while corporate earnings growth has boosted global equities. And the reemergence of volatility, after an abnormally calm 2017, reminded investors of the benefits of diversification.


Key themes for the rest of the year

Overall, we believe the growth and earnings outlook look favorable over the remainder of the year, but we also expect volatility to persist. We believe investors should be closely following 4 key themes that could determine the direction of the market:

What we see now

US labor market data shows that there are now more job vacancies than there are unemployed people, but we have yet to see a significant rise in inflation.

What we’re watching

If a tight labor market begins to translate into greater wage growth and higher inflation, the Federal Reserve may be forced to hike rates faster than expected, pre-maturely ending the economic expansion.

What we expect

We believe rising wages and lower unemployment are a product of a strong growth environment, which should continue to support earnings growth and therefore our global equity overweight.


What we see now

The Trump administration has levied duties on Chinese imports and imposed tariffs on steel and aluminum. But trade disputes so far are not economically significant and have only involved the US.

What we’re watching

Retaliation could lead to escalation, and NAFTA negotiations remain uncertain. A full blown trade war would be a significant headwind to global growth.

What we expect

We believe tariffs will remain limited, and a negotiated solution remains our base case. But while we remain overweight global equities, we also hold positions to protect against downside risks such as a trade war.


What we see now

The European Central Bank (ECB) announced last week that it will end quantitative easing this year.

What we’re watching

The absence of QE could translate into higher borrowing costs, reduced business investment, and slower growth, which will bring into question the sustainability of the Eurozone's growth rates.

What we expect

We believe consumer and business confidence will support economic growth, but we remain neutral on the Eurozone as we await further data.


What we see now

After exceeding its 6.5% GDP target in the first quarter, China's growth appears to be slowing, with social financing growth down 10.3% year-over-year.

What we’re watching

A potential slowdown in china could have a ripple effect on other countries given its importance to the global economy.

What we expect

We believe a growth slowdown will be controlled and are neutral emerging market equities, with China as our preferred market in Asia.

Mark Haefele

Chief Investment Officer

UBS Global Wealth Management


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