UBS: Three, two, one

Since early October, investors have been counting down to when the European Central Bank (ECB) will decide on its quantitative policy. The primary question being posed is: will the ECB continue buying bonds at a pace of EUR 80bn a month beyond March or “taper” its asset purchases? President Mario Draghi offered no answers after the rate setters’ October meeting. So which of the two options – taper or no taper – is most likely? 

CIO’s base case is that the ECB will start tapering next year. When quantitative easing (QE) began in January 2015, the euro area was in deflation (–0.6% y/y), and Brent oil prices were dragging down headline numbers. Fast forward to today, and inflation stands at 0.4%, while crude is 9% higher in euro terms than a year ago. 

Fewer oil price headwinds suggest inflation will rise toward the central bank’s price stability target by end 2018 or early 2019, according to Draghi. The ECB has an inflation target of “below, but close to 2%.” Given the ECB’s forward guidance, it makes sense to reduce monetary stimulus gradually as price pressures build, not when 2% is within touching distance. 

What are the top three investment implications?

1. The euro should rise in response. Higher prices and a healthy current account surplus should boost the euro in trade-weighted terms, following a 7% decline last year. Less ECB accommodation and an external surplus underpin the EUR, while a weaker USD should reflect only a gradual Federal Reserve hike cycle and a widening external deficit. EURUSD can therefore rally toward 1.20 in 12 months.

2. Core government bonds like German Bunds are already pricing in decreased ECB liquidity, but yields may rise further. Ten-year yields have climbed around 20 basis points from post-Brexit lows to hover around 0%. We expect them to reach 0.3% in 12 months. This supports continued underweight positions on high grade debt in portfolios.

3. CIO is neutral on Eurozone stocks over our tactical six-month investment horizon. A stronger euro could reduce Eurozone firms’ competitiveness abroad, and weigh on international earnings. On the flip side, greater growth may give firms a welcome increase in domestic sales. For now, these positive and negative effects look balanced.

Higher inflation and steeper yield curves globally may lead investors to rotate into leveraged, more value-oriented sectors. Our equity strategists recently upgraded global and US financial stocks to overweight, reflecting some possible easing of interest margin pressures on the back of higher US rates. Eurozone banks are still not a buy however, as the sector needs more loan growth, clarity on regulatory requirements, and further cost containment to justify current consensus earnings expectations.

Draghi hinted the ECB would announce its policy plans at its December meeting, which coincides with the release of new growth and inflation forecasts. If ECB staff members pare their forecasts, the taper debate may well be postponed further. But all else being equal, we identify three investment implications, two taper scenarios, and one base case outcome. Three, two, one… and countdown to December.

Authors:

Mark Haefele, UBS Global Chief Investment Officer Wealth Management

Matthew Carter, Global Investment Office

Der komplette Marktausblick als pdf-Dokument.