The world's largest wealth manager talks about how clients are repositioning for a world where bond yields - prompted by rising inflation expectations - have risen. Investors are repositioning their portfolios.

The rally in equity markets that has taken place has further to run while the increase to bond yields, which has already happened, will continue modestly from now, according to UBS.

Growth and inflation forecasts are rising, fuelled by vaccine progress in some nations and the US’s recent financial stimulus bill, the bank’s global wealth management arm said in a note pitched at the Asia-Pacific region.

Interest rates have risen - the yield on the benchmark 10-year US Treasury is up by nearly 1 per cent since 2020 - sitting above 1.70 per cent. UBS said it expects it to climb to 2 per cent by the end of 2021.

As a result of the changes, investors have rotated out of the tech firms, which did well out of the COVID-19 lockdown winners, towards more cyclical stocks, as well as value stocks and commodities (ex-gold). Bond investors have switched somewhat from investment grade to high yield. 

With the 10-year yield set to rise further, this rotation is likely to continue in the months ahead, UBS said. It recommends that clients change their portfolios to more value-oriented stocks (financials, energy, industrials) and cyclical markets (India, Singapore).

“But, as we expect the pace of yield increase to be modest from here, and as it broadly reflects stronger inflation expectations, we think the equity rally has further to run. Hence, we continue to prefer Asia ex-Japan stocks overall and see appealing entry points opening up for long-term exposure to emerging high-growth secular themes in Asia,” the bank said. 

“The recent pace and magnitude of the rise in 10-year US yields (as well as real rates) was clearly sufficient to unsettle markets, but we don’t believe further increases will be as disruptive. However, the forces that brought us here are likely to continue to fuel the rotation to value and cyclicals for now,” it said. 
 

Asian countries
UBS said that a steepening bond market yield curve and an economic recovery “paint a positive backdrop for capital values of physical property.” In Singapore, UBS said that it expects private home prices to rise by up to 5 per cent this year, supported by economic growth, low mortgage rates and an improving employment situation. 

In Hong Kong, UBS expects home prices to grow by 2 per cent to 3 per cent in 2021. Despite rising yields, CIO expects Hibor to remain stable over the next 12 months, which should keep mortgage rates low. Improving economic growth, robust end-user demand, and limited near-term supply should provide support for home prices. Property curbing policies should continue to discourage speculative activities.

Mainland China, expects 2021 national property sales (in values) to decline by 3 per cent to 5 per cent, but prices to remain broadly stable in spite of the inflationary trend. Beijing’s policies to contain price increases should cap home price hikes, and milder inventory build-ups in lower-tier cities should result in softer prices there, versus higher-tier cities (where prices should rise by less than 3 per cent).