Asset Management

UBS Cuts Global Equity Stance Amid Trade War Angst

Tom Burroughes Group Editor 8 August 2018

UBS Cuts Global Equity Stance Amid Trade War Angst

The world's largest wealth manager is concerned that protectionist pressures will intensify before they improve, and has cut its overweight global equities position.

(Correction: an earlier version of this news item stated UBS had cut its overweight equity stance to neutral; the bank retains a small overweight stance. A corrected version follows.)

UBS Global Wealth Management, with SFr2.372 trillion ($2.39 trillion) of invested assets, has moved from a bullish, aka overweight, position on equities amid worries about the effect of escalating protectionism between the US and other countries.

The world’s largest wealth management house has been overweight global equities since January 2017, pushing it up another notch at the start of this year. But rising protectionism – such as US President Trump’s tariffs on China – have given UBS cause for concern, making it turn more cautious. 

“It now concedes that a solution may only be achieved after several painful rounds of talks and new tariff measures,” the group said in a statement. 

The organisation said it has has assigned a 60 per cent chance of trade tensions escalating further. It expects trade tensions to persist until after the US midterm elections at the earliest, and possibly for the entire duration of the Trump administration.

Equities in many regions have struggled to make ground this year, with those in some regions falling into the red. The MSCI World Index of developed countries' equities shows total returns of 2.56 per cent (adding reinvested dividends to capital growth), in dollars. With equities having been in a bull market for almost a decade, there are fears that even without protectionist worries, the market is ripe for a correction, particularly if the Federal Reserve tightens policy further with labour markets seen as tight.

“UBS believes markets are not sufficiently pricing in a fresh round of tit-for-tat tariffs, which have the potential to impact business investment and hiring. As a result, it is advocating a broadly neutral risk exposure to offset the risks stemming from rising protectionism,” it said.

Caroline Simmons, Deputy Head of UBS Wealth Management’s UK Investment Office, said: “While we expect the trade disputes to ultimately be resolved before the world is tipped into another recession, our base case now assumes things will get worse before they get better. The benign macroeconomic environment, and strong fundamentals, have emboldened a recent sense of market optimism. But there is a very real danger of overlooking the possibility of the trade situation getting worse, which could have significant impacts, such as supply-chain disruptions, reduced hiring, and lower investment.”

UBS has also cut its cyclical exposure at a sector level. In the US, it is downgrading its position on the industrial and utility sectors. Similarly, in the eurozone, it is downgrading its position on the consumer discretionary sector, amid fears of an escalation in the trade conflict.

“The ultimate impact of retaliatory actions is difficult to quantify and is likely to vary significantly among sectors. However, fears of a tit-for-tat global trade war is enough to drag on a number of sectors. Take the European car industry, for example. If the US applies a 20 per cent tariff on European car imports into the States, manufacturers could see a 15-20 per cent drop in operating profits,” Simmons said. 

“Investors can take strategic measures to offset these kind of risks. They will need to make a conscious effort to become more global in their asset diversification. Hedging currency exposures to protect local purchasing power is undoubtedly worthwhile,” she added. 


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