UBS: Tired titans

Chinese authorities have been dealt tactical defeats in their efforts to prop up the domestic equity market and fix their currency. Investors are now deeply skeptical of the Bank of Japan’s (BoJ) ability to meet inflation targets without further stimulus. And the US Federal Reserve’s decision to keep interest rates at record lows confused markets by adding new language about global growth concerns. With more central banks playing a role in how global growth evolves, investors require a high risk premium until the growth picture improves. Recent market moves have investors questioning the efficacy of quantitative easing’s (QE) upside impact on equity markets. Markets are likely to remain fragile in anticipation of economic growth data that are still a few weeks away. 

But we do not believe central banks have exhausted their strength. Nor do we think that weak economic data represents more than a mid-cycle slowdown. Much of the recent weakness around the world has been concentrated in manufacturing,while service sectors continue to expand. In addition, developed economies have held up despite the downturn in emerging markets. With upcoming numbers likely to reflect ongoing economic and earnings growth, we expect developedmarket equities to move higher over the next six months. Thus, we are overweight risky assets. 

We have made one change to our tactical positioning this month: a downgrade in US high yield from overweight to neutral. This position, which has performed well since initiation in 2011, no longer offers an attractive risk-adjusted rate of return. An increase to our equity overweight position is under consideration, but we need to see a reduction in market volatility and evidence that developed market economies are stable before taking action.

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