Emerging market assets – equities, sovereign bonds and currencies – are the most likely to produce double-digit returns in the second quarter of 2010, notwithstanding some volatility, as the economic recovery continues, says UBS Wealth Management Research.  

Fears over European debt woes, tighter regulation and monetary tightening, which hit in the first quarter of this year, have been disproportionate to economic fundamentals, says UBS. It expects these to recede, and the global economy to continue to recover as companies restock their inventories.

However, the timing of monetary and fiscal exit strategies, as well as continued improvements in private consumption, remain crucial, says the Zurich-listed bank.

However some investors expect the deleveraging process to constrain private consumption in the western world for some time, but there are hopes that other economies - with higher saving rates - will pick up where they have left off.

Despite these dangers, UBS points to improved business sentiment and improving corporate earnings as reasons for optimism, and expects equities and corporate bonds to move forward, on the back of this and good valuations.

Within equities, it expects emerging market equities to outpace developed markets due to higher structural growth. Emerging market equities have underperformed developed equities on a year-to-date basis, improving relative valuations slightly, but have outperformed them strongly on an annualized basis for the period 2005-2009. They are closer to their 20-year price-to-earnings ratio than the European Monetary Union, Japan, Switzerland, the US and the UK - which are all further below theirs.

Consequently, the bank also likes Eurozone and UK equities, for which investors currently pay 11 times next year’s earnings, and which are trading at a discount of approximately 15 per cent versus global equities.

High dividend stocks offer a more stable longer-term return as opposed to other more cyclical stocks, and are a good option for investors who have benefited from attractive yields on corporate and high yield bonds last year. Also, various academic studies have shown that dividends are an important component of return for an equity investor, says the bank.

At a sector level, it thinks IT is positioned to benefit from pent-up demand after years of corporate underinvestment, and that, for a more defensive bet, consumer staples companies are likely to gain from stable income generation and increasing consumption in Asia. 

Global growth will also feed into demand for commodities and boost the asset class, says UBS. Particularly, a lack of spare capacity within OPEC and increased demand from emerging markets will drive the crude oil price up, and gold will continue to be buoyed by government debt fears.

Commodities have performed badly year-to-date, as they are sensitive to growth expectations, but rallied strongly last year, as expectations turned positive about the global economy.

In other investment calls, UBS advises reconsidering the status of government bonds as a safe haven, due to exploding debt levels and unattractive yields, and reducing exposure to long-dated government bonds.