UBS: Gravitational waves

Weakening economic data, volatility in oil prices, and concerns about a financial crisis in China have contributed to a difficult start to the year. With trillions of dollars’ worth of bonds trading at negative interest rates, and trillions more printed in quantitative easing around the globe, markets have become worried that policymakers may have “run out of ammo,” to fix economic woes.

We share the market’s concerns about the slowing pace of growth and the diminishing marginal returns of monetary policy in some regions. And until we see an uptick in economic data, stable oil prices, tighter credit spreads, and better news on capital flows in China, volatility is likely to remain high. We are maintaining a neutral stance on equities in our global tactical asset allocation.

That said, we still believe that the world is not heading for recession, and that policymakers have not lost the willingness or ability to avert crisis.

The sell-off has created new opportunities. For instance, even excluding the troubled energy sector, US high yield debt has a credit spread of more than 700bps, effectively pricing in recession. We believe investors with limited exposure to the asset class could see this as a good opportunity to build up long-term holdings, and we move to overweight this month. 

We are also closing our underweight position in UK equities. After years of relative underperformance, we believe the prospects are good for an earnings growth revival for UK firms. A weak pound and a diminished share of commodities within the index should boost profits. We are funding this move by reducing the size of our overweight position in Eurozone equities.

Author: Mark Haefele, UBS Global Chief Investment Officer Wealth Management

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