UBS HouseView. Bubble thoughts. Digest. US Edition CIO Wealth Management Research. December 2013

Transcription

1 UBS HouseView Digest Edition CIO Wealth Management Research December 2013 Bubble thoughts

2 Bubble thoughts Five years ago the Federal Reserve announced its first round of quantitative easing (QE). QE has since become part of the global economic landscape, helping to cut borrowing costs while supporting asset prices. Since QE s inception, global equities have returned more than 15% annualized, Treasuries close to 5%, and high yield credit more than 20%. Alexander S. Friedman Global Chief Investment Officer Wealth Management Yet this time period has also been a distinctly mediocre one for the global economy. Such a disconnect is now leading some to question whether QE s reflation of asset prices represents a bubble. While there are some concerns, ultimately, long-term investors should only care whether sentiment has pushed valuations beyond reasonable levels. In short, it has not: investors need not fear that we are in the midst of a dangerous bubble in risk assets. Share valuations today, whether judged by simple ratios of prices to earnings in equity markets or by cyclically adjusted earnings yields that factor in the business cycle, appear fair to slightly high. Earnings growth may drive price appreciation, but investors should not expect a repeat of the 15%+ annualized returns enjoyed the past five years. Annual returns of 7%-8% are more likely. Against the backdrop of a number of changing market dynamics, we are making two changes to our tactical asset allocation. First, we are adding a short position in the Japanese yen relative to the dollar, to replace a long position in Japanese equities. Having enacted few structural reforms, Japan may have to increase the size of its asset purchase scheme, which will directly affect the yen but may not boost equities as much absent further reform or economic progress. Second, we are increasing our position in Eurozone equities. The Eurozone benefits from rising global growth due to its cyclical exposure. With corporate margins three percentage points below their 2011 peak, significant scope remains for earnings-led outperformance. Alexander S. Friedman 21 November 2013 This Digest contains excerpted material. read the full version, please see the UBS House View Investment Strategy Guide. DECEMBER 2013 UBS HOE VIEW: DIGEST 1

3 Tactical preferences and Eurozone equities look attractive as global growth is accelerating and central banks remain supportive. cap Large Value Int l Developed Mid cap Small cap Markets Emerging Fixed income Markets Gov t Muni IG Corp HY Corp Int l Developed Emerging Markets Markets Asset Classes Tactical a allocation Tactical asset allocation Commodities Non traditional D EUR GBP Fo F reign exchange JPY cap Equities Large Growth CHF Other Cash THIS MONTH 1) Equities Within international equities, we downgrade Japan to neutral and increase our overweight on the Eurozone. 2) Fixed income We maintain an overweight on high yield credit, and for taxable investors, prefer municipals to other high-grade bonds. 3) Foreign exchange We are adding a new underweight position on the yen versus the dollar, and remain overweight the pound versus the Swiss franc. LEGEND Overweight: Tactical recommendation to hold more of the asset class than specifi ed in the strategic asset allocation Underweight: Tactical recommendation to hold less of the asset class than specifi ed in the strategic asset allocation Neutral: Tactical recommendation to hold the asset class in line with its weight in the strategic asset allocation NOTE: TACTICAL TIME HORIZON IS APPROXIMATELY SIX MONTHS 2 UBS HOE VIEW: DIGEST DECEMBER 2013

4 Preferred investment views As of 22 November 2013 Asset Class Most preferred Least preferred Equities Fixed income Foreign exchange Eurozone ( ) small and mid caps housing e-commerce fi nancials technology capex ( ) Water-linked investments Dividend growth REITs over Utilities Equal-weight investing North American energy independence competitiveness high yield Investment grade credit 1 EM corporate bonds Preferred securities senior loans GBP D ( ) UK Switzerland Government bonds CHF JPY ( ) Commodities Platinum Recent upgrades Recent downgrades 1 Municipal bonds preferred in taxable portfolios, investment grade corporates in tax-exempt portfolios. DECEMBER 2013 UBS HOE VIEW: DIGEST 3

5 Asset class overview Economy Despite October s government shutdown, employers added 204,000 jobs in October. Meanwhile, Janet Yellen, who is poised to become the Fed Chair at the end of January 2014, has defended the central bank s easy monetary stance, telling a Senate hearing that I consider it imperative that we do what we can to promote a very strong recovery. The ECB cut its policy rate to 0.25%. Given that inflation is only 0.7% year-over-year and GDP grew 0.1% between the second and third quarters, we expect the ECB to remain supportive for longer. In China, the recent Third Plenum led to the announcement of a wide range of structural reforms. Equities Global growth is expected to be higher in 2014 than 2013 the first annual acceleration since 2010 which we expect to provide support for global equities. company earnings are expected to grow 8% in 2014, driven by solid domestic demand. In the Eurozone, earnings are showing tentative signs of a turnaround and we expect them to grow at a low double-digit rate in 2014, supported by improving economic growth and expansionary monetary policy. We are overweight both regions. We expect Japanese equities to perform broadly in line with global equities, and believe that playing Japan via an underweight in the yen offers a better risk return than a Japanese equity overweight. And our least preferred equity markets are the UK and Switzerland, due to their defensive sector compositions. Fixed income Government bond yields increased over the past month a er good economic data increased expectations of QE tapering by the Fed. We expect yields to continue to gradually increase in the coming months, resulting in negative returns on government bonds, and the tapering to start in March However, we recommend overweight allocations to high yield and global investment grade bonds, which offer attractive yields and the potential for tighter spreads. Commodities Broadly diversified commodity indices have been struggling recently, with price weakness particularly acute in precious metals. We continue to think gold is vulnerable and have a 6-month price target of D 1,150/oz. Foreign exchange We believe that the British pound offers upside potential against the Swiss franc as the UK economy remains strong. We also expect the Bank of Japan to counter economic weakness with more monetary easing in 2014, and thus prefer the dollar over the Japanese yen. 4 UBS HOE VIEW: DIGEST DECEMBER 2013

6 Disclaimer Sources of strategic asset allocations and investor risk profiles Strategic asset allocations represent the longer-term allocation of assets that is deemed suitable for a particular investor. The strategic asset allocation models discussed in this publication, and the capital market assumptions used for the strategic asset allocations, were developed and approved by the WMA AAC. The strategic asset allocations are provided for illustrative purposes only and were designed by the WMA AAC for hypothetical investors with a total return objective under five different Investor Risk Profiles ranging from conservative to aggressive. In general, strategic asset allocations will differ among investors according to their individual circumstances, risk tolerance, return objectives and time horizon. Therefore, the strategic asset allocations in this publication may not be suitable for all investors or investment goals and should not be used as the sole basis of any investment decision. Minimum net worth requirements may apply to allocations to non-traditional assets. As always, please consult your UBS Financial Advisor to see how these weightings should be applied or modified according to your individual profile and investment goals. The process by which the strategic asset allocations were derived is described in detail in the publication entitled UBS WMA s Capital Markets Model: Explained, Part II: Methodology, published on 22 January Your Financial Advisor can provide you with a copy. Deviations from strategic asset allocation or benchmark allocation The recommended tactical deviations from the strategic asset allocation or benchmark allocation are provided by the Global Investment Committee and the Investment Strategy Group within Wealth Management Research Americas. 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