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UBS says take your profits in a volatile, low-growth world

Diverging monetary policy and foreign exchange reserve falls are driving up volatility, UBS says Photo: Diego LevyLow growth and inflation are the “new normal”, part of a structural shift in the world’s top economies to which investors must adjust their expectations and take profits where they can, UBS says.
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That is one of the three themes from the G20:20 report, a white paper that analysed the ability of the Group of 20 to achieve the additional 2 per cent growth target of set by then chair in 2014. Also marking challenges for the G20 was divergent monetary policy and the decline in foreign exchange reserves.

“It has been the case that it has been possible to achieve good returns by simply siding with central banks,” said the report’s author, UBS Asset Management head of investment strategy Tracey McNaughton.

The divergence in monetary policy is widening, expected to rise from 30 per cent of G20 central banks moving this year to 80 per cent next year, split 50-50 between raising rates and cutting, would cause even more volatility.

But low growth is set to stay. In the past 12 months the G20 has recorded 2.3 per cent growth, against 2.5 per cent the previous year, while more than two-thirds of G20 economics had an inflation rate of 1 per cent or less, the report said.

This, combined with very low interest rates, meant “less is the new normal”, Ms McNaughton said.

“Populations are getting older and productivity is slowing. These two factors alone are putting downward pressure on potential growth rates.”

“It is starting to dawn. This low growth period is not cyclical; it’s structural.”

Wingate Asset Management chief investment officer Chad Padowitz said the challenge was that markets were priced on the expectation that global growth would continue apace or improve.

“If the economy in general doesn’t come to the party, there’s likely to be an earnings adjustment needed and that earnings adjustment will have a valuation and share price impact,” he said.  ‘Be nimble’

Ms McNaughton said the implication for investors was that they needed to become active and know when to take a profit.

“It is going to be difficult for investors to achieve targeted returns. They need to be far more nimble and take profits earlier than previously thought,” she said.

“Picking the directions of markets is going to be a challenge. You need to act fast when you hit a profit level and constantly review them.”

Companies needed to reduce their hurdle rates, the expected return they get on an investment, before business investment would pick up, she said.

“It’s partly that the shareholders themselves have still very high expectations and, because they are getting older, they’re demanding their total return to come from income rather than growth.”

The UBS Global Investment Solutions team lists n equities as unattractive, mainly due to their weightings in the financials and miners that would continue to struggle. European and Japanese equities remain in favour.

The theme was echoed by BetaShares chief economist David Bassanese, who said while n equities had outperformed in November in unhedged n dollar terms, the preference for international equities remained.

“Although global equities appear to be prepared for US Federal Reserve rate hikes, history suggests a cautious neutral stance at best – as does the fact price-to-earnings valuations remain relatively stretched,” he said.

In fixed income, Ms McNaughton said n 10 year bonds, at 3 per cent yield, were attractive amid the global search for yield. That yield search was also keeping the n dollar elevated despite the ongoing slide in commodity prices.

Bill Gross also said last week that investors needed to protect their money in 2016.

“One day the negative feedback loop on the real economy will halt the ascent of stock and bond prices, and investors will look around like Wile E. Coyote wondering how far is down,” he said.

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