UBS WM bullish on Europe, China

Added 18th December 2015

A strong overweight on equities in Europe and a surprising move on emerging markets are among UBS’s allocation calls for 2016, according to Patrick Grossholz, Asia-Pacific head of investment management.

UBS WM bullish on Europe, China

Equities continue to be an investment theme put forward by the bank’s chief investment officer. In the context of tactical asset allocation for a balanced portfolio within the discretionary business, the strongest overweight is European equities, followed by Japan and then Asia, Grossholz told Fund Selector Asia.

However, within Asia, India has been reduced to neutral from overweight. To reflect these views, UBS Wealth Management recently added an Asian equities fund, though he declined to name the product.

China was upgraded in November to an overweight. “We are of the view that the recent market correction was probably a bit too strong,” he said.

UBS uses a combination of A and H shares to gain China exposure. Grossholz sees a sectoral swing, from more traditional sectors to the internet space, and believes the next investment trend involves China’s digital revolution.

“Short-term volatility will continue to be high, but overall China is an overweight due to stimulus measure, the bottoming out of earnings and its relative defensiveness in an Asian context.”

"The risk on a balanced portfolio is that the return expectation by clients will not match what the portfolio can deliver"

US equities get a neutral rating.

Somewhat surprising is an upgrade of emerging market equities, which investors have widely shunned. UBS recently moved emerging markets up to neutral after a “very long underweight”, Grossholz said.

Unconstrained products

“On the bond fund side, people like unconstrained products, not benchmark-driven ones, because they give the fund manager flexibility,” added Michael Christo, head of IPS portfolio specialists.

“In the past six months, we’ve seen interest in unconstrained pick up.”

Three months ago, UBS on-boarded an undisclosed fund which uses an unconstrained strategy that provides the fund manager with flexibility to take advantage of market conditions, he said.

The firm’s discretionary balanced portfolio is currently equity 42% (tactically 44% -- a 2% overweight), 3-5% cash and the rest in fixed income.

Grossholz said that UBS reviews strategic asset allocation (SAA) every 12-18 months, while other banks may review it every three- five years. The right SAA will bring 80% of performance, with 10% coming from TAA and 10% by instrument selection, he estimated.

2016 Risk

Concern over devaluation of China’s RMB remains high, Grossholz said. “In every meeting we talk about having RMB exposure hedged.”

Clients are transferring RMB back into US dollars, Christo added. “They see limited upside to the RMB and don’t know the magnitude of the downside. It’s a complete reversal from the first half of [2015] to the second."

In 2016, the bank sees equities generally performing well during the first half. However, interest rates were finally raised 25 basis points this month and that could mean that inflationary pressures may emerge.

In fact, next year, UBS believes emerging inflation could be a surprise event. Should that happen, commodities would have a volatile period and equities and fixed income would have a challenging second half, Christo said.

Risk enhancers

Grossholz sees risk coming from investor expectations.

“The risk on a balanced portfolio is that the return expectation by clients will not match what the portfolio can deliver,” he said.

“Not that we will disappoint the client, but expectations are different, particularly on the fixed income side. If interest rates rise, these clients after fees will have lower returns.”

He’s considering adding more risk on equity in the balanced portfolio, and he is looking at hedge funds.

Christo added that clients have become more receptive to hedge funds. "When there’s volatility, it’s the best time to educate the client."

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