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.
Following an integrated and systematic investment process, the UBS economists analyze the evolution of market drivers and strategists assess key risks and favorable investment opportunities. Scenarios are defined, challenged and debated, and from this process the Chief Investment Office formulates its strategy – the UBS Wealth Management Investment House View – to navigate the investment landscape successfully.
February 2016: Mind the gaps
Currently, we consider the risk and reward for equities balanced. While low oil prices have never provoked a US recession, cheaper crude has not yet provided the expected boost to the US consumer. Fears of a China hard landing have made global markets acutely sensitive to even minor policy changes or slight disappointments in markets and data. The correlation between the Shanghai and US equity markets has soared, and the recent correction can be traced to a modest 1.5% devaluation of the Chinese yuan versus the US dollar.
These new sources of volatility need to be digested by the markets to enable them to find direction. Opportunities to overweight and underweight equity markets remain, but overall we consider it best to be neutral on equities in our global tactical asset allocation (TAA). Yet this is no time for investors to abandon long-term investment discipline. We should remember that market falls can represent good opportunities to rebalance portfolios toward long-term strategic allocations.
In the remainder of the letter, I address some of the ‘gaps’ we are watching to inform our investment positioning. These include the gap between strong consumption and weak manufacturing, which is now a global phenomenon; the gap between oil production and demand, which has caused a jarring 75% slide in prices since summer 2014; and the gaps that are popping up in markets related to pegged currencies, which are indicative of the current global instability. In the months ahead, investors will need to ‘mind the gaps’ that these transitions are creating, and watch for more potentially destabilizing changes, such as a possible ‘Brexit’ from the EU, or unexpected changes in Federal Reserve interest rates.
Some of the gaps caused by market volatility are also creating opportunities. A variety of divergences contribute to our global TAA positioning, such as an overweight to Eurozone equities and European high yield credit, and underweights to emerging market (EM) stocks, UK equities, and high grade bonds. We are making two changes to our global TAA this month, closing our overweight position in Japanese equities relative to UK equities, and initiating an underweight Japanese yen position relative to the US dollar.
Global Chief Investment Officer Wealth Management
As a UBS client, you can subscribe to receive the UBS House View Monthly Letter on the CIO Portal of UBS e-banking or via your client advisor.
Languages: German, English, French, Italian, Spanish, Portuguese, Chinese (simplified and traditional), Japanese and Russian.