Investment Strategies
Stay Invested But Expect Stormier Weather - UBS

Investors should remain overweight in global equities - the bull market in stocks is in its last phases, the world's biggest 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 2019 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. Citi Private bank, for example, has urged clients to
protect portfolios against more volatility.
“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 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 of how 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 – as with the package of tax cuts last December –
should wane. 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 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 wills
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.