The risks to the global economy and markets have increased following a worsening of US-China trade tensions, which “justifies a reduction in risk our portfolios,” wrote Mark Haefele, global chief investment officer at UBS Wealth Management in client note at the weekend.
His bearish recommendation followed President Trump’s call on US companies to find an “alternative to China”, and an announcement of further tariffs on Chinese goods.
UBS Wealth believes that the latest tariffs will be more damaging than previous measures because they cover a range of consumer goods—including smartphones, personal computers, cameras, and clothing—for which it will be harder to find substitutes from elsewhere.
“Downside risks are increasing for both the global economy and markets. As a result, we are reducing risk in our portfolios by moving to an underweight in equities to lower our exposure to political uncertainty,” said Haefele.
As a result, UBS Wealth, which advises on $2.5trn of assets owned by wealthy clients (according to its website), has made three changes to its tactical asset allocation.
It has removed an overweight to global equities versus high grade bonds; initiated an underweight to emerging market stocks versus high grade bonds; and has overweighted some high yielding emerging market currencies versus low yielding currencies
“While equities still look attractively valued relative to government bonds, uncertainty in the trade relationship between the US and China caps the upside for now,” said Haefele.
He believes emerging market companies are more exposed to rising market volatility, a slowing global economy, and heightened trade tensions, and UBS also remains underweight UK stocks compared with US dollar-denominated emerging market sovereign bonds.
“This brings our overall position in equities to underweight,” he said.
Asia allocations
Yet, in Asia, UBS Wealth remains overweight China and Malaysia, and underweight Hong Kong and Thailand.
“While China is in the centre of the storm, Hong Kong is even more exposed to the global trade slowdown…[meanwhile] Malaysia could benefit if the US escalates the trade dispute by further raising tariffs or by stepping up technology restrictions, as it is one of the most defensive equity markets in Asia,” wrote Adrian Zuercher, UBS Wealth’s head of Apac asset allocation, in a separate note.
UBS Wealth also continues to favour carry (buying high interest rates and selling low interest rates) strategies in credit and foreign exchange markets, which benefit from central bank easing in a low-growth environment. Specifically, it remains overweight the Indian rupee and Indonesian rupiah versus Australian and Taiwan dollars.
So, despite its headline underweight to core equities, UBS Wealth is still prepared to take on risk positions.
The firm remains confident that the US can avoid a recession in 2020, with growth supported by Federal Reserve easing and robust consumer spending.
“At this time, we would caution investors against large equity underweights,” said Haefele, adding that “we stand ready to make further changes as the US-China trade talks and market moves evolve”.
Cautious bias
Other wealth managers have also turned more nervous in recent weeks.
Another Swiss firm, Pictet Wealth Management, told FSA that although it doesn’t see a market collapse on the imminent horizon, it is “happy with our underweight in equities and neutral position in US bonds as a recession hedge”.
Earlier this month, Hong Kong-based Oreana Financial Services CIO Isaac Poole explained to FSA that it had “tilted” toward the highest quality government debt, and away from equities, and high yield credit at the likely prospect of a US recession.
In July, Indosuez Wealth joined growing trend among private bank portfolio allocators towards a neutral position on global equities, and a shift to high grade fixed income.
