The Swiss-based asset manager expects the global economic recovery to persist next year, and become more self-sustaining as the latest medical innovations allow for the normalisation of private-sector activity.
“However, with negative real interest rates across advanced economies, and likely to stay that way through 2021 and beyond, investors will have to work harder to generate yield,” Evan Brown, head of multi-asset strategy, UBS AM, told a webinar yesterday.
Multi-asset hedge funds and alternative assets should be an appealing option in this environment, and in the publicly-traded universe, investors should lift exposure to emerging market bonds, according to Brown.
“Infrastructure is likely to be a prime beneficiary of global economic stimulus packages, while low level of yields on developed-market sovereign means investors will have to look more global. In our view, this makes emerging market dollar-denominated debt, including Chinese government bonds, particularly compelling,” he said.
Indeed, there are few opportunities in major sovereign bond markets with government yields at negligible or zero levels.
“The exception is China, where 10-year government bond yields pay 3.3% and dollar-based investors should be protected by a stable or appreciating renminbi,” said Brown.
In particular, Brown favours value equities — including some cyclical stocks as economies normalise, Asian equities and credit, and emerging market foreign exchange.
The case for value (and cyclical) equities rests on the “normalisation” of economic activity, as countries relax their lockdown measures and mobility and business activity resume.
“But although North Asian mobility is already back to normal, the US and Europe continue to struggle,” he said.
Geoffrey Wong, UBS AM’s head of emerging markets and Asia Pacific equities, told the webinar that Asia companies (especially large caps) have healthy balance sheets, low levels of debt and high cash reserves, and that stock prices are trading at around historical average price-earnings, compared with above-average multiples in other regions.
“Moreover, the relative inefficiency of Asian markets, especially the retail investor dominated Chinese market, means there are superior active management return opportunities in the region,” said Wong.
The longer-term investment case for Asia remains as strong as before the coronavirus pandemic, he added.
These include a shift to discretionary spending on transport, education, and premium consumer goods as the households become richer; increased spending on healthcare and insurance as populations age; the development of China’s semiconductor industry; and more financial inclusion throughout the region.
Hayden Briscoe, UBS AM’s head of Asia Pacific fixed income, is equally positive about the region’s credit markets.
“Asian investment grade and high yield bonds have a shorter average duration, but higher yield than their equivalents in the US,” he said.
He attributed the discrepancy to the bond purchases by the Fed which have propped up US corporate fixed income prices, whereas there has been no similar activity by Asian central banks.
“Asia credit should catch up, especially because it sovereign fundamentals are so robust, making the region a sea of stability,” said Briscoe.
Meanwhile, the US dollar will likely continue to weaken in a low-interest rate environment, and although other countries might also persist with loose monetary policies, they cannot “out-dove the Fed”, which should be positive for emerging market currencies, according to Brown
The main risks to markets, according to Brown, are logistical difficulties in distributing coronavirus vaccines, inadequate fiscal stimulus by governments and an inflation scare delivered from a low base.
Gold should be included in portfolios as a “strategic diversifier” in case there is a problem with the introduction of vaccines, he said.
Nevertheless, although markets are likely to be volatile as investors assess the progress, distribution and efficacy of the various Covid-19 vaccines, Brown doesn’t expect “a major drawdown in risk asset prices”.
Market disruptors
UBS AM also identifies five potential market surprises.
First, some companies and sectors might be more vulnerable to disruption from cyber-attack as the coronavirus virus and economic lockdowns have seen significant adjustments to office and work-from-home practices.
Second, effective and quickly distributed vaccines would likely allow a faster than expected return to normalcy while monetary stimulus stays ultra-accommodative, leading to a “blow-off rally in equity markets”.
Third, political wrangling over government spending measures in Washington, and reduced fiscal appetite in Europe might mean that “a bridge to the vaccine is lacking over coming months”, which could lead to a double-dip in the global economy and markets.
Finally, new US leadership sets the stage for re-engagement with China, including a reduction in tariffs and a slowdown in tech export restrictions.
“Reduced uncertainty and an improved trade picture could catalyse a major flow shift from developed to emerging market assets,” according to UBS AM.
