Investment Strategies
Keeping Assets Diverse - UBS' Wealth Management CIO Sees Brighter Times Ahead

The chief investment officer for UBS Wealth Management sets out his firm's asset allocation thinking for the next few months - with a few surprises in the mix.
In a diverse spread of ideas, UBS Wealth Management's chief investment officer Alexander Friedman cites that US equities, especially mid cap stocks, emerging market equities, corporate bonds, the UK pound sterling and platinum have all been flagged as preferred themes in his economic outlook and asset allocation report.
In its monthly newsletter, titled The Global Tricycle (April 2013), UBS Wealth Management said it expects the global economy to grow by 3 per cent in this year, an improvement from the 2.6 per cent achieved in 2012.
The US economy continues to improve, including encouraging developments in business sentiment, retail sales, labour market conditions, corporate earnings, and house prices. At the same time, the US Fed is likely to maintain their expansionary monetary policies, the Zurich-listed firm said.
While in the eurozone, the crisis in Cyprus underlines that risks around the debt crisis still persist. However, less fiscal tightening compared to last year and the backstop provided by the European Central Bank will help the region to emerge from recession this year, it said.
The balance of growth and inflation looks healthy in most emerging markets, UBS's Friedman continued. And while gradual rise in Chinese inflation could lead to less accommodative policy in the second half of 2013, UBS said it is not expected to halt the acceleration in growth.
Equities
“The backdrop of accelerating global growth and accommodative monetary policy favours investing in equities, and we maintain our overweight position in US and emerging markets,” Friedman said.
The bank estimates that US corporate earnings will grow by 6 per cent in 2013. It prefers mid-cap companies over large-caps for the next six to 12 months. UBS is also positive on US housing, some stocks in banking, household products, and believes home improvement sectors with attractive valuations will stand to benefit from increasing demand.
UBS maintains its overweight position in emerging market equities. “They have underperformed developed markets by close to 10 per cent year-to-date primarily due to country specific factors, notably in Korea, China, and Brazil. However, we do not believe the fundamental case for investment in EM has changed and yet valuations have become more appealing,” Friedman said.
“We see EM [emerging market] earnings growth of around 11 per cent over the next 12 months, as global monetary policy should remain accommodative,” Friedman continued.
UBS has also identified some “western winners” from emerging market growth, more specifically companies from a variety of sectors in Europe, the US and Japan which have significant exposure to the rapidly developing regions.
UBS’ least preferred market is Canada, where it says earnings dynamics are weaker than in other regions while valuations are expensive.
Fixed income
Developed market high grade bonds (primarily government bonds) remain its least preferred asset class.
“While we don't foresee a sharp rise in benchmark interest rates in the months ahead, we think the risk reward outlook of high grade bonds is unfavourable given expected returns are lower than inflation,” UBS said.
US high yield bonds on the other hand still offer potential for tighter spreads and solid returns, supporting an overweight position for the bank.
Within emerging market hard currency debt, UBS picks corporate over sovereign due to its more attractive valuation and higher overall yield. “Over a 6-month horizon, we expect EM corporate bonds to deliver total returns of more than 3.5 per cent,” it said.
Meanwhile “top-notch Asian banks” no longer outshine the competition in the bond scene, according to UBS, prompting it to remove this theme from its preference list.
Commodities
While cyclical commodities may profit from accelerating global growth, UBS sees better risk return prospects in other asset classes and maintains a neutral stance with platinum being crowned the “preferred theme” by the wealth manager’s CIO.
“Production costs continue to rise, with marginal production costs now around $1,600/oz. If this supply backdrop meets with improved economic activity in the latter part of 1H13 and in 2H13, the platinum market will be under-supplied by 4.5 per cent in 2013,” the bank said.
With this supportive backdrop, it targets a move toward $1,800-1,850/oz during 2013.
Foreign exchange
UBS said the valuation for sterling is attractive (over the euro), thanks to the UK Treasury recently reaffirming the Bank of England's 2 per cent inflation target, and economic data in the UK being likely to come in ahead of the eurozone for Q1 and Q2.
“As a result, we expect extreme short positions to reverse soon. On the other hand, the recent crisis in Cyprus highlights persisting risks for the euro,” the bank said.
UBS named emerging market currencies “an under-appreciated asset class”. It said that they have potential to contribute positively to the longer-term returns of a well-diversified portfolio.
“We believe that this is especially relevant now that the developed world is settling into an extended period of very low interest rates,” it added.