ubs forum. sharper opinions, smarter decisions · 2/5/2015 · ubs forum. sharper opinions, smarter...
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UBS Forum. Sharper opinions, smarter decisionsMadrid | Milan | London | Frankfurt | Zurich
Thursday, February 5 2015
Head of Investment Office UKUBS Wealth Management
Bill O'Neill
The Diverging WorldCIO Year Ahead 2015
Chief Investment Office WM
This report has been prepared by UBS AG.Please see important disclaimers and disclosures at the end of the document.Past performance is no indication of future performance. The market prices provided are closing prices on the respective principal stock exchange. This applies to all performance charts and tables in this publication.
The Diverging World
Section 1
Uneven growth“The main regions are at different stages of the cycle”
-6
-4
-2
0
2
4
6
8
10
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
US Eurozone BRIC + Mexico (equally weighted)
GDP growth (4qma, %)
Source: Haver, UBSPlease see important disclaimer and disclosures at the end of the document.
Differing growth rates point to divergent policy responses“Some countries transition away from life support, and some head deeper”
Source: Haver, UBSPlease see important disclaimer and disclosures at the end of the document.
0%
10%
20%
30%
40%
50%
60%
2006
2007
2008
2009
2010
2011
2012
2013
2014
ECB BoJ
Central bank balance sheet assets / GDP
0%
5%
10%
15%
20%
25%
30%
2006
2007
2008
2009
2010
2011
2012
2013
2014
Federal Reserve
Central bank balance sheet assets / GDP
Inflation outlook: Flirting with deflation“Inflation rates are likely to fall further in the first half of the year”
Source: Haver, UBSPlease see important disclaimer and disclosures at the end of the document.
2009 2010 2011 2012 2013 2014 2015 2016
US Eurozone UK
CPI y/y (3mma)
UBS forecast
-2
-1
0
1
2
3
4
5
6
Clustered consensus“Many forecasts are clustered in worrying proximity”
0 1 1
36
45
7
10
5
10
15
20
25
30
35
40
45
50
<1.0 1.5-1.99 2.0-2.49 2.5-2.99 3.0-3.49 3.5-3.99 >4.0
US 2015 real GDP growth forecasts (%)
0 03
37
14
0 00
5
10
15
20
25
30
35
40
<0.0 0-0.49 0.5-0.99 1.0-1.49 1.5-1.99 2.0-2.49 >2.5
Eurozone 2015 real GDP growth forecasts (%)
Source: Haver, UBSPlease see important disclaimer and disclosures at the end of the document.
Economic outlook 2015
Section 2
US: Leading the way“A broadening and a deepening of US growth drivers”
1.6%
2.3%2.2% 2.4%
3.1%US real GDP growth (%)• Growth to accelerate to 3.1% from 2.4%
• Repair of consumer balance sheets
• Improvement in credit conditions
• Abatement of fiscal headwinds
Source: Bloomberg, UBSPlease see important disclaimer and disclosures at the end of the document.
Eurozone: Playing catch up“Europe has been a disappointment in 2014”
1.7
–0.7
–0.4
0.8
1.2
Eurozone real GDP growth (%)• Growth disappointed in 2014, at 0.8%
• Expect modest acceleration to 1.2% in 2015
• Supportive factors include the weaker euro, expansionary ECB, and an improvement in credit conditions
Source: Bloomberg, Thompson Reuters, UBSPlease see important disclaimer and disclosures at the end of the document.
UK: Sustained GDP growth, subdued inflation“UK to remain amongst the best performing G7 economies”
-8
-6
-4
-2
0
2
4
-2.5
-2.0
-1.5
-1.0
-0.5
0.0
0.5
1.0
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
UBS forecast % q/q (lhs) % y/y (rhs)
• UK GDP growth to reach 3.0% in 2014, and slow to 2.6% in 2015
• Inflation to moderatefurther in 1H15. Falling oil price increases risk of drop to 0%
• Still-easy credit conditions, elevated business and consumer confidence and growing real incomes
Source: Haver, UBSPlease see important disclaimer and disclosures at the end of the document.
UK: Monetary policy to remain accommodative in 2015“MPC to start tightening in 4Q in response to evidence of a sustainable recovery”
Source: Haver, UBSPlease see important disclaimer and disclosures at the end of the document.
• Lack of inflationary pressures point to the first rate hike in November 2015
• The fiscal effort remains substantial
• Risks : general election in May, restrictive fiscal policy, and the challenging external environment (Europe)
In %
Emerging markets: Changing gears“Emerging economies need to shift gears and rely less on an export model”
• Declining growth in recent years. We see 4.5% in 2015 (4.6% in 2014)
• Divergences within EM based on reform agenda
• Asia ex-JP to see higher growth than EMEA and LatAm
Source: Bloomberg, UBSPlease see important disclaimer and disclosures at the end of the document.
Investing in 2015
Section 3
Equities: US and Euro vs EM“US equities have superior earnings growth”
Source: Bloomberg, UBS.
• Equities not cheap; earnings growth to drive returns
• OW US equities: steady earnings growth amid a strong domestic economy
• OW Eurozone equities: EUR weakening supportive of European exporters' earnings
• UW EM equities: falling commodity prices weigh on earnings
80
100
120
140
160
180
200
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
80
100
120
140
160
180
200
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
US 12m trailing earnings-per-share Emerging markets 12m trailing earnings-per-share
Bonds: Credit vs high grade“Investors should seek higher yields in credit”
• Yields exceptionally low vs history: returns likely to be limited
• UW high grade bonds: Low level of yields, expected to rise (US in particular)
Source: Bloomberg, BEA, UBS.
0
50
100
150
200
250
300
350
400
450
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
1985
1988
1991
1994
1997
2000
2003
2006
2009
2012
Operating profits Interest payments
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
20%
1964
1968
1972
1976
1980
1984
1988
1992
1996
2000
2004
2008
2012
US government bond yield Performance next 5y
• OW credit: Low default rate and supportive growth and financing conditions, focused on US high yield
• UW EM bonds in USD
Yield and subsequent performance (%) US corporate operating profits and interest payments (USDbn)
Alternatives: Equity long-short and private debt opportunities“Alternatives play an important role in improving portfolio returns”
Source: Bloomberg, UBS.
• Comparatively attractive returns as equity/bonds returns moderate
• Hedge funds: prefer equity long-short funds. Cautious on macro
• Private markets: opportunities in private debt
800
900
1,000
1,100
1,200
1,300
1,400
-
0.05
0.10
0.15
0.20
0.25
0.30
0.35
0.40
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
S&P 500 Intra-Stock-Correlation (50d-rolling)HFRI Equity Hedge
0
2
4
6
8
10
12
14
16
2005 2006 2007 2008 2009 2010 2011 2012 2013World EEC
Intra-stockcorrelation (50d rolling)
HFRI equity long-short
index
Non-performing loans ratio (%)
Foreign exchange: US dollar vs euro“Monetary policy divergences will continue in 2015”
• In general, investors should hedge currency exposure
• A diverging world presents some tactical opportunities while increasing currency volatility
• The US and UK to begin normalising monetary policy; ECB still on the easing path– OW USD and GBP – UW EUR and CHF
Source: Bloomberg, UBS.
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
10/1
0
02/1
1
06/1
1
10/1
1
02/1
2
06/1
2
10/1
2
02/1
3
06/1
3
10/1
3
02/1
4
06/1
4
10/1
4
US Germany
10-year government bond yield (%)
0
2
4
6
8
10
12
14
16
18
10/0
9
04/1
0
10/1
0
04/1
1
10/1
1
04/1
2
10/1
2
04/1
3
10/1
3
04/1
4
JP Morgan FX Volatility Index (%)
Growth Divergence in growth with solid and resilient US and UK growth, while Eurozone slowly improves and China's growth weakens.
Policy Divergence in monetary policy, as the US and UK begin raising interest rates while Eurozone and Japan are forced to loosen policy further.
Equities Overweight US assets specifically US equities relative to EM equities. We also have a small overweight position in Eurozone equities.
Bonds Prefer developed market corporate bonds (Investment grade and high yield), over high grade and EM bonds.
Overweight USD and GBP vs. EUR and CHF.
Prefer equity long/short within hedge funds.
Monitor cash levels within portfolios given continued burden on overall returns. Avoid excessive home bias as markets diverge and volatility rises
"Diversification is the only free lunch in finance.” Harry Markowitz
FX andAI
Final message
Key takeaways
PM Global Balanced since start of CIO investment processCumulative relative performance contribution
Security selection (basis points)Tactical asset allocation (basis points)
Source: UBSBased on TM UBS (UK) Global Balanced, from 31st December 2011 to 31st December 2014, gross of fees. Figures show contribution to overall portfolio relative returns against portfolio benchmark, measured in basis points. Past performance is not an indication of future returns
Cumulative excess return of 551 basis points, with both tactical asset allocation & security selection adding over 260 bps each
1
-76
89
-37
207
11
-35
2
108
-5
18
6
290
(100) 0 100 200 300 400
Cash
Govt. bonds
Corp. bonds
Global bonds
HY & EM bonds
UK equity
Europe equity
Swiss equity
US equity
Canada equities
EM equity
Japan equity
Total
Tactical Asset Allocation
6
-11
19
53
-21
136
60
0
-17
-3
16
22
261
(50) 0 50 100 150 200 250 300
Cash
Govt. bonds
Corp. bonds
Global bonds
HY & EM bonds
UK equity
Europe equity
Swiss equity
US equity
Canada equities
EM equity
Japan equity
Total
Instrument Selection
Disclaimer
The value of an investment, and the income from it, can fall as well as rise and you may not get back the amount originally invested.
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