UBS: Focus and diversify

In last year’s CIO Year Ahead: A Diverging World, we detailed why investors were likely to face lowerreturns and higher volatility in 2015. But it is one thing to make a forecast, and another to live through such challenging times. 

While developed market equities have delivered positive total returns over the past 12 months, the third quarter of 2015 brought us the sharpest quarterly decline in equities and weakest performance for diversified portfolios since 2011, and the biggest spike in volatility since 2008. Markets have since rebounded, but I believe higher volatility and more modest returns are here to stay. Our world is in the process of transition in many areas – from central bank policy in the US, to a shift in drivers of growth in emerging markets. 

Corporate capitalism is also in transition: government and regulatory tolerance for corporate failure has Focus and diversify plummeted. Some listed companies have shown the concentrated risks that investors assume when they over-allocate money to single stocks. At a minimum, the deep selloffs in Volkswagen and Glencore should make every investor double (and triple) check their conviction in individual positions. 

In the face of all this, investors will need to: a) maintain a long-term focus to avoid getting caught up in month-to-month moves, and b) avoid overexposure to single company risks, which are arguably higher than ever.

In our tactical asset allocation this month, we are shifting our underweight in emerging markets to neutral. We believe that while the fundamental situation remains challenging, much bad news has now been priced in, and the potential for positive surprises from China has risen.

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