UBS WM joins the portfolio protection parade

Asset Class in Focus

The private bank is the latest wealth manager to essentially steer neutral, but recommend a tilt toward portfolio protection.

Markets continue to reach record highs, with the S&P 500 up 20% year-to-date after a ten-year bull run. But wealth managers are concerned about how long the good times can last as it gets later in the business cycle. Corporate earnings warnings are appearing, and the IMF downgraded global growth in 2019 to 3.3%, the lowest since 2009.

Therefore, private banks have been emphasising a review of portfolio protection. JP Morgan suggested high-dividend-paying stocks for some downside protection and Citibank earlier this year called for a cautious risk-on.

Yifan Hu, regional chief investment officer for UBS Wealth Management, also stressed investors buy protective products as a way to hedge risks.

“We still see opportunities in the late period of [the business cycle],” Hu said, speaking at a recent Hong Kong media event. “The major difference from the early and middle period is that investors should now stay vigilant of the downside risks.”

Hu also noted that checks to ensure portfolio diversification of assets and geographic exposure are crucial.

Equity preference

In general, Hu likes equities. Globally, the bank is overweight US equities but underweight Europe and the UK, while markets await a Brexit decision later this year. For Asia stocks, the firm has overweights in mainland China and Malaysia and underweights in Hong Kong and Thailand.

“In terms of stocks, we are still optimistic about the global stock market opposed to bonds, because interest rates are [expected to be] kept at a very low level.”

She noted that since president Trump was elected in 2016, the Fed began to raise interest rates, but now the market consensus is that it will cut interest rates at least once this year.

“Across the globe, interest rates will likely remain fairly low. In this case, there is indeed some pressure on allocation to global bonds,” Hu added.

In terms of meaningful risk, she was fairly calm. “UBS is now relatively neutral on risks,” Hu said.

She did not see further degradation in the US-China trade dispute, currently the most significant influence on global growth and investment.

“As long as the negotiations between China and the United States continues, there will be no cliff-like decline.”

Indeed, Hu sees the possibility of piecemeal progress. She believes the US and China will ink certain agreements such as large purchases from US businesses, while China will continue to open its financial markets.

“For the past few years, geopolitics have brought uncertainties to the market. Investors should [instead] focus on long-term investment themes, for example, population increase, aging and urbanisation,” Hu said.

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