UBS: Global Perspectives - Political risk biggest driver

• Central bank action remained the key driver of financialmarkets. The European Central Bank (ECB) remained in “wait and see” mode much to the dismay of markets. As expected, the US Federal Reserve (Fed) also remained on hold and continued to lower their economic growth forecasts and trimmed the number of rate hikes they foresee in 2017. The Bank of Japan (BoJ) launched a new kind of monetary easing, targeting price rather than quantity in its bond-buying program.

• Uncertainty surrounding the UK’s exit plan from the European Union remains. The status quo has been maintained by pushing back the negotiations and difficult decisions. In Europe, Italy will vote on electoral reform in early December.

• UK equities were at the forefront of risk assets, boosted by a weaker pound and firmer commodity prices. Emerging market equities continued their upward trend, benefiting from a boost in global risk appetite. Japanese equities also performed well as economic activity and labor markets strengthened modestly. European and US equities were more subdued, ending on a broadly flat note.

• Most key government bond markets registered negative returns. Although yields increased in the first half of the month, they moderated considerably in the final few weeks. Credit spreads remained broadly flat in the US and the UK, but widened in Europe in both the investment grade and high yield universe on lack of more stimulus from the ECB and on concerns over the strength of the European banking system.

Outlook:

• Market concerns about China have remained subdued as stimulus measures such as fiscal loosening, reserve requirement ratio and interest cuts drive an improvement in data.

• Based on our analysis, emerging market equities have looked attractively valued for some time. While our concerns about industrial capacity and external debt loads remain, we see a number of powerful catalysts supporting equity prices over a more tactical horizon. We continue to prefer developed equity markets outside of the US with Europe being a particular focus.

• Within fixed income, we favor investment grade corporate bonds, which we believe remain well-supported when an ever-growing percentage of sovereign bonds trade on anegative yield. We continue to favor inflation-linked bonds in the US over their nominal counterparts due to emerging signs of wage inflation that we do not believe is reflected in prices.

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