Investors should turn to quality bonds because of their attractive income and potential for capital gains as growth and rates fall; quality stocks, especially tech, are best positioned to maintain earnings growth.
That is the view of UBS Global Wealth Management’s (UBS GWM) chief investment office (CIO) in its year ahead 2024 outlook.
The Swiss wealth manager’s CIO’s base case is for a “soft-ish landing” in 2024 and in that scenario, they expect both equities and bonds to generate positive returns.
“Slowing US economic growth, falling inflation and lower interest rate expectations should mean lower yields, supporting bonds and equity valuations, while the absence of a severe US recession should be sufficient to enable companies to continue to grow earnings,” the wealth manager said.
Regarding fixed income, there has been no shortage of asset and wealth managers who have proclaimed that “bonds are now back” as the US Federal Reserve is widely expected to pivot and begin cutting rates sometime next year.
UBS GWM is forecasting high-single digit returns for Asia investment grade credit next year, noting that a downward shift in rates will likely be the biggest source of returns. Within investment grade, it favours senior financials and Indonesia.
Equally, UBS GWM urges investors to limit cash balances and instead favours tools including fixed-term deposits, short-duration bond ladders and select structured solutions instead.
Regarding equities, over the long term, unsurprisingly, UBS GWM sees the largest returns as coming from those companies that are set to benefit from the AI boom.
“Once people are happy with all the policy support, then people will shift to fundamentals because at the moment, we are facing all these uncertainties. As a result, if people were focusing on fundamentals, the market would not be trading at 9x P/E.”
eva lee, ubs global wealth management
“The largest equity market gains in the next decade will likely come from companies that deliver, enable, or use new technology for growth, gaining market share, or cutting costs. We see opportunities in companies that apply and monetise AI across software, internet, and semiconductor sectors,” it said.
In the near term, UBS GWM is forecasting double-digit returns in Asian equities next year, buttressed by attractive valuations and high-teen earnings growth. It singles out the IT, consumer discretionary, materials and industrials sectors as providing the best combination of attractive earnings and valuations.
In China, the firm singles out domestic-oriented sectors with leading capabilities in the consumer, green and tech sectors as well as select banks.
At a press briefing, Eva Lee, head of greater China equities at UBS GWM’s CIO, noted that investors were waiting for further signs of policy support despite the government announcing plans last month to issue Rmb1trn ($141bn) in sovereign bonds by the end of the year.
“Once people are happy with all the policy support, then people will shift to fundamentals because at the moment, we are facing all these uncertainties. As a result, if people were focusing on fundamentals, the market would not be trading at 9x P/E,” she said.
As growth also shifts beyond China and supply chains reroute, UBS GWM also singles out India, Indonesia and the Philippines as potential bright spots.
Finally, with regards to alternatives, UBS GWM noted that private credit would offer high yields and provide better protection than public debt, while regarding private equity, the firm favours mid-market buyout and secondaries funds.
