2018: Get Active!
Amid robust economic growth and limited evidence of an impending downturn, UBS Chief Investment Office (CIO) remains positive on global equity markets in 2018.
For 2018, growth is expected to remain at the current healthy rate of 3.8 percent.
CIO's positive view on markets does not mean that investors will have nothing to worry about in the changing investment context. Volatility may return to more normal levels (i.e. rise), on the back of monetary tightening, political flux, technological disruption, and sustainability challenges. These changes can bring their own set of opportunities and risks that should be carefully monitored and evaluated.
For 2018, CIO advises investors to be agile, balanced and calm.
Be more agile
After years of outperformance (and market share growth) by passive funds, conditions are now more favorable for active management. Correlations between S&P 500 stocks recently fell to a 16-year low and, from 2000 to 2016, equity long-short strategies generated average annual alpha of 6.5 percent or more when correlation was lower than the median. Active managers can also exploit the wide dispersion in valuation between the cheapest and most expensive stocks, which is at the 80th percentile of its range since 1991. Hedge funds historically have outperformed during rate hiking cycles. These changing market dynamics give CIO confidence that a more agile investment stance will pay off next year, opening up market opportunities that arise from shifts in monetary policy, political developments, and technological change.
Strive for balance
Any outperforming investment, whether it’s a single asset, a favored sector, or an exciting country, can tempt us to increase our portfolio concentration. This classic investor mistake looks particularly risky in 2018. Balancing a combination of equities, bonds, and alternatives can reduce investment risk. During the global financial crisis in 2008 - 2009, US stocks tumbled 51 percent from their peak, while a diversified portfolio declined just 29 percent.
Accessing investment or company-specific information has never been easier. But this overload can lead to poor investor outcomes. Social media feeds shaped by artificial intelligence mean confirmation bias is more prevalent than ever. It can be tempting to trade frequently, but analysis of short-term trades show the chances of positive performance on any given day is just 52 percent. Maintaining a long-term focus is critical and also requires investors to resist ill-considered investments based on the fear of missing out (FOMO). Calm means following a trusted investment framework, reducing excessive portfolio examination, and matching your investment strategy with your financial goals.