The bottom line
Today the majority of US voters disapprove of both prospective presidential candidates. Investors seem to dislike all of their choices too, be it bonds, cash, or equities. In the five years we have been hosting our April UBS Davos summit, which once again brought together global fund managers representing over 10 trillion US dollars of assets, we have never heard such a lack of conviction about markets or such a divergence of views about which asset classes will perform well or badly.
Political events will continue driving uncertainty and volatility for the foreseeable future. The UK referendum on its continued membership in the EU, now less than a month away, could impact assets in Europe. In the US, both the Democratic and Republican parties are poised to choose polarizing candidates as their presidential nominees. Adding to the mix, political vacuums in Spain and Brazil could unsettle European and emerging markets respectively. And moving into next year, changes in the composition of China’s politburo could affect the pace of economic reform.
In addition, investor conviction has been undermined by weaker corporate earnings in the US, Eurozone, and Japan, along with continued sluggishness in emerging markets. As a result of this combination of political risk and disappointing earnings, we believe it is advisable to take only modest levels of risk in our global tactical asset allocation.
Yet while investors must continue adapting to a world of slower growth, there are still enough areas of profit resilience to support investment cases for certain regions. In the US, we believe that the headwinds for earnings are turning into tailwinds as pressures from a strengthening dollar and weakening oil prices abate. That justifies an overweight position in US equities. In the Eurozone, profit growth has been curbed by the recent rise in the euro and hence the outlook for equities looks less attractive than at the start of the year. Still, we do not believe the deterioration is sufficient to cause investors to flee risk assets altogether. We are still holding an overweight in European high yield credit, which benefits from improving financial conditions, low default rates, and central bank bond purchases.
Global Chief Investment Officer Wealth Management
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