UBS Continues To Smile On US Equities, Dollar

Tom Burroughes

1 July 2013

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.