UBS Wealth Management is sticking to its view that US
equities, the dollar and US
high-yield credit are preferred assets, thanks to a strengthening economy and accommodative
US Federal Reserve, according to the latest monthly investment note from the
Swiss bank.

“In the current environment, these positions still make
sense: the US
is one of the few regions where we have confidence that monetary conditions
will suit the growth outlook. The Fed will tighten policy only in response to
better growth. If growth disappoints, the Fed is highly likely to maintain loose
policy and could reverse recent market expectations of a ‘tapering’,” the bank
said.

“As a result, US assets should continue to benefit from a
monetary or economic tailwind, as opposed to other regions, such as some
emerging markets, which effectively import US monetary policy through capital
flows, but do not control it,” the bank said in a note from Alexander Friedman,
global chief investment officer, UBS Wealth Management.

The report said that, as one example of an improving US
picture, home prices are rising at their fastest pace since 2005, while consumer
sentiment is at its highest level since 2007, and the private sector is growing
by more than 3 per cent a year.

“Such growth should permit a 7 per cent earnings increase
for the S&P500. Within US equities this month, we are adding, alongside our
long-standing theme on US-mid caps, a CIO Preferred Theme focused on US
financials, which stand to benefit from accelerating loan growth, improving
asset quality and higher margins as a result of steeper bond yield curves,” the
bank said.

On the foreign exchange front, UBS prefers the US and
Canadian dollars; it expects that in the long run, US monetary policy is likely
to be tighter than in the eurozone, UK or Japan, which means the Greenback will
benefit in terms of relative yield differentials.

Japan

Friedman said UBS continues to smile on the Japanese stock
market, despite recent concerns as to how credible is the “Abenomics” policy mix
– named after Japanese premier Shinzo Abe.

“We remain overweight on Japanese equities. They have
suffered notable declines in recent weeks, in no small part due to the
deleveraging dynamic I described earlier, which has led to a sharp unwind in
long equity futures positioning, and a strengthening in the yen,” Friedman
said.

Friedman said the recent victory for Abe’s LDP party at the
Tokyo Metropolitan Assembly election boded well for its prospects in the
national Upper House elections in July. When the polls are over, he expects Abe
to unveil more detailed plans about economic reforms and boost sentiment on the
equity market.

“Additionally, with much of the froth now out of equity
positioning, we believe volatility in Japan will decline and we consider
current levels an attractive entry point,” he added.