The Swiss wealth management house remains neutral on equities and argues that the sell-off in global equities offers an entry point to build for long-term gains.

Investors should use the opportunity created by the heavy selling in global equity markets to get back on board for the long term, argues UBS Wealth Management.

With global markets getting off to a miserable start to 2016, having ended last year on a dull note, the air is full of alarm. So far this year, the MSCI World Index of developed countries’ shares, for example, has fallen 10.5 per cent (in dollars). A key “fear” indicator in the form of gold prices, is flashing red, with the yellow metal pushing above $1,200 per ounce for the first time since June last year. It is argued that financial markets have lost faith in the ability of central bankers to revive the global economy. 

“Risks related to the US economic growth, China, oil markets, and, most recently the European banking sector have driven a sharp sell-off in risk assets year-to-date. We believe these concerns are legitimate, but that markets have broadly priced in these risks. We see potential for intervention from central banks or governments,” Mark Haefele, global chief investment officer, UBS Wealth Management, said in a note. “Given also that our base case is for no US growth recession, we believe investors should take the opportunity presented by the market sell-off to rebalance portfolios back toward long-term strategic asset allocations,” he continued.

Haefele said that despite recent heavy selling to markets, UBS remains neutral on equities. In the short run, it said the likelihood of more market-friendly central bank statements or action boosting risk asset prices is balanced by the fact there has been little improvement in economic indicators, as well as fresh concerns about credit conditions in Europe.

“As we noted in early January, when we reduced equities and added to high-grade bond positions, markets are fragile and vulnerable to further shocks. We listed declining oil prices, uncertainties over Chinese policy decisions, and weaker US manufacturing data as factors to monitor. The recent sell-off is being driven by many of the same factors. But additional concerns have also emerged, regarding the European banking system and credit markets,” he continued.

“While we would like to see an improvement in the global growth picture before turning more constructive on equities, we estimate markets are already pricing in a roughly 30 per cent chance of a US recession, and continued central bank policy intervention remains an upside risk for markets,” Haefele said.

Oil and China
Haefele said that oil prices have been a “critical driver of equity markets in 2016”; he noted that the three-week correlation of crude prices to global stocks hit 95 per cent in January. “We believe that the market is right to be concerned about oil prices remaining at low levels: we expect the default rate among US high yield energy firms to rise to 15 per cent over the coming year, and energy sector capex cutbacks have already negatively impacted US jobs and economic growth in selected states,” he said. 

“However, we believe the market is failing to appreciate some of the positive factors. We continue to expect the benefit that low oil prices have on consumers' spending power to materialise in the months ahead. Furthermore, cutbacks in output should also help push Brent crude prices back to around $55/bbl in 12 months, alleviating the pain for oil producers. For US stock markets, energy's share of S&P 500 market capitalisation is around 6.5 per cent, whereas beneficiary sectors such as industrials, consumer staples, and consumer discretionary have a combined weight that is around five times larger,” he said.

In the case of China, Haefele said recent figures show continued capital flight from China; data showed that the country’s forex reserves fell by almost $100 billion in January, to $3.23 trillion.

“As long as this outflow persists, markets will continue to discount the risk of a sharp yuan devaluation and subsequent depreciation from Asian trading partners. We believe the risk of this occurring stands at around 30-40 per cent,” he said. “But in our base case, we continue to believe that selective monetary and fiscal easing in China should prove sufficient to stabilise both economic growth and capital outflows, while limiting concerns about a disorderly exodus of international funds from the region.”