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Stay Invested, But Expect Stormier Weather - UBS

Tom Burroughes, Group Editor , December 7, 2018

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Investors should remain overweight in global equities but the bull market in stocks is in its last phases, the world's top wealth manager predicts.

The investment environment is going to get more volatile in coming months, putting pressure on high net worth and ultra-HNW individuals to diversify against risk and be more choosy about where they deploy capital, according to UBS, the world’s biggest wealth manager.

The Zurich-listed firm predicts that global economic growth will decelerate to 3.6 per cent in 2018 from 3.8 per cent, and company earnings will also slow down. On the other hand, the bank does not expect the world to tip into recession next year, and markets have already factored in a lot of adverse news. In late November UBS, whose total invested assets at its wealth arm stood at SFr2.392 trillion ($2.39 trillion) at the end of September, actually raised its overweight stance in global equities.

UBS argues that the bull market in stocks that has been in place since 2009 is moving into its late stages. Ironically, the strongest returns for equities can often be seen in the late stages of such a cycle, investment professionals at UBS told journalists at a briefing this week.

The bank is not alone in seeing an economic deceleration next year. According to the Organisation for Economic Co-Operation and Development, global gross domestic product is now expected to expand by 3.5 per cent in 2019, compared with the 3.7 per cent forecast in last May’s OECD outlook, and by 3.5 per cent in 2020. Bank of America Merrill Lynch expects the S&P 500 Index to peak next year, and sees profit growth decelerating. On the other side of the Atlantic, UK-listed wealth manager Schroders has cut its 2019 global economic growth forecast to 2.9 per cent from 3.1 per cent. Back in the US, Citi Private Bank has urged clients to prepare portfolios for more volatile markets next year.

“Investors should retain positions in global equities but plan for market volatility,” Mark Haefele, chief investment officer for UBS Global Wealth Management, said. “A slight slowdown in economic and earnings growth doesn’t mean no growth, and the recent sell-off has left a number of assets more attractively valued, but investors must also take into account the tense geopolitical environment as well as monetary policy tightening,” he continued.

The firm recommends investors to stay overweight in global equities into 2019, but guard against market swings by being overweight in medium-duration US government bonds and the Japanese yen, and to focus on quality companies and avoid excessive credit risk.

Recent years have seen investors, such as those at the wealthier end, shift towards alternatives such as private capital (debt and equity, infrastructure and real estate), because they are willing to shoulder the higher illiquidity in return for the yield. But even here, stresses may be building. A few days ago, wealth managers flagged the area of private equity – a sector seeing big inflows from family offices and other sources in recent years – as a potential pain point because funds now hold more than $1.0 trillion of unused capital, aka “dry powder”.

UBS predicts that the US Federal Reserve will approach the end of its tightening phase next year, while support from fiscal stimulus moves should wane – as with the package of tax cuts last December. Current account and fiscal deficits will weaken the dollar, the bank said.

In Asia, the Chinese renminbi, aka yuan, will decline, affected by worries about US-China trade tensions, slower Chinese growth and a falling current account surplus. UBS economists said that the state of the Chinese housing market remains a point of vulnerability although authorities have been astute so far in managing the amount of debt and leverage in its financial system.

As for Europe, UBS predicts that the European Central Bank will start to put interest rates on a more normal footing next year after a decade of ultra-loose monetary policy, and this will support the euro against other currencies.

Splits between professionals and the public
The bank notes that when professional investors’ views and those of high net worth clients are compared, there is a notable split. For example, almost half of the professionals see the US lagging global markets in 2019, but two-thirds of HNW investors expect the US to match or even beat the rest of the world.

Almost half of professionals expect the dollar to weaken against other major currencies but less than a sixth of HNW investors hold the same view.

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