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UBS WM's investment picks for a maturing cycle

The Swiss private bank has outlined investment ideas for an ageing US bull market and slowing economic cycle in its 2019 outlook

US equities

Within US equities, UBS Wealth Management is overweight financials and energy, particularly oil. CIO Mark Haefele said that valuations of financials are near a 10-year low relative to the market, with the sector’s total yield at over 6%.

The bank also prefers value stocks relative to growth investing. Price-to-earnings ratio multiples for US value relative to growth stocks are near a post-2002 low.

Haefele also recommends equity buy-write strategies because they capture both equity and volatility risk premiums.

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US equities

Within US equities, UBS Wealth Management is overweight financials and energy, particularly oil. CIO Mark Haefele said that valuations of financials are near a 10-year low relative to the market, with the sector’s total yield at over 6%.

The bank also prefers value stocks relative to growth investing. Price-to-earnings ratio multiples for US value relative to growth stocks are near a post-2002 low.

Haefele also recommends equity buy-write strategies because they capture both equity and volatility risk premiums.

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Asia ex-Japan equities

Haefele said that emerging market (EM) value stocks are poised for recovery, and has an overweight in Asia ex-Japan equities. He is specifically overweight China, South Korea, Singapore and Indonesia.

In China, UBS expects old economy stocks as well as companies related to infrastructure and materials to perform well.

On a sectoral basis, the wealth manager prefers select financials and technology stocks as well as high-yielding names with strong balance sheets and a history of sustainable payouts.

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EM bonds

UBS forecasts Asian credit to generate about 3–4% total return in 2019 but is staying highly selective on names.

‘With Asia investment grade likely to be fundamentally stable, we like selective BBB government issuers in China, and Tier 2 financials in Asia, with yields near 5% for bonds with durations of three to five years,’ Haefele said in the report.

He also stated that investors should watch oversold debt and longer-duration government bonds in Turkey and Argentina in case of any opportunities.

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Asia Pacific currencies

UBS sees see more weakness in Asia Pacific currencies in the first half of 2019 on the back of rising US dollar yield advantage, coupled with a deceleration in Asia’s economic activity and export growth.

However, the bank expects the currencies to find relief toward mid-2019, as the US Federal Reserve turns more dovish, marking a turning point for the broad US dollar cycle.

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Sustainable investing

Within equities, theme-based ESG approaches, and strategies that focus on identifying companies experiencing an uptick in sustainability performance can help diversify a portfolio across regions and market capitalisations, Haefele said.

However, he cautioned that narrowly-defined thematic strategies could experience higher volatility during market turbulence.

In terms of fixed income, bonds issued by multilateral development banks generally offer liquidity and safe-haven qualities similar to sovereign bonds, according to UBS.

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Alternatives

Within hedge funds, UBS recommends diversified and market neutral approaches to limit exposure to the direction of equity and bond markets.

The bank also favours relative value and macro managers who can exploit mispricing and volatility.

In the private equity space, the funds of growth equity managers are less crowded and less leveraged, Haefele said.

He also recommended managers that can take advantage of key mega trends such as ageing demographics, population growth, and urbanisation.

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