UBS, like many other wealth managers, expects equities to perform relatively well in 2014, sounding a note of caution about the impact of when central banks wind down the printing of money that has been in process since 2008.

UBS, like many other wealth managers, expects equities to perform relatively well in 2014, sounding a note of caution about the impact of when central banks wind down the printing of money that has been in process since 2008.

In the CIO Year Ahead 2014 report, produced by UBS Wealth Management, global chief investment officer Alex Friedman said global economic growth will accelerate next year, making equities and credit a preferred home for investors’ money.

The Zurich-listed firm has changed parts of its strategic asset allocation to reflect its forecasts about market performance in the next five to seven years. It favours stocks, credit and diversified hedge fund investments, preferring these to areas such as high-grade bonds.

UBS expects the global economic recovery will gather pace in 2014, with global gross domestic product growth rising to 3.4 per cent in 2014. It expects that yields on government bonds and other high-rated bonds in developed markets, which have been historically low in recent years, should start returning to historical norms.

"In 2014, the overall environment for return-seeking investors should be positive. Entering 2014, our highest tactical conviction is to be overweight asset classes with higher potential for returns, including equities and US high yield credit,” Friedman said.

Among other predictions from the bank is that the US will “set the pace for the developed world, as it is the furthest along in its deleveraging efforts”; the eurozone should continue to grow, albeit at a slower pace than in the US; Japan will soon face a test over whether government reflation efforts are working and Bank of Japan monetary easing will depress the yen yet further. UBS also predicts that emerging market GDP growth will accelerate slightly in 2014, from 4.5 per cent to 5 per cent.

Strategic view

UBS said strategic asset allocations feature an increased weighting in credit, including high-yield bonds and emerging market sovereign and corporate bonds, and a sizeable allotment to hedge funds, depending on the specific allocation.

"The beginning of the end of quantitative easing will bring about rising bond yields, undoubtedly affecting the returns available in high-rated developed world bonds," said Friedman. "We believe credit should play a more integral role in investors' strategic allocations than may have been assumed in recent years,” it said.

UBS expects diversified investments in hedge funds to outperform traditional holdings in the five-year time frame due to their lower average volatility and greater ability to protect investors against losses.

Commodities in aggregate are likely to suffer from soft demand and mildly negative returns in 2014 and beyond. While gold, for example, has merits as long-term "insurance" against extreme risks such as hyperinflation, the CIO has made no SAA allocation to it or any other commodity, although investors can still capture short-term opportunities in tactical allocations. The CIO also prefers to hedge exposure to currencies where relevant on a strategic, longer-term view and to seize opportunities in the asset class on a tactical, shorter-term basis, the bank said.

(On a separate issue, Friedman is quoted by WealthBriefing in one of a series of items this publication has issued about the recent Global Philanthropy Forum 2013 event in St Moritz.)