THE UBS GLOBAL ASSET MANAGEMENT Cyclical Market Forum, held quarterly to discuss three plausible economic scenarios and their potential implications for investments over the next 12 months, found its 1Q13 Forum cautiously optimistic about risk assets, although participants warned that the situation in Europe could remain volatile. Three market scenarios are proposed at each Cyclical Market Forum and debated by UBS Global Asset Management investment teams with combined assets under management of more than USD 634 billion worldwide.
The participants generally believed that a “risk-on” atmosphere would prevail over the next six to 12 months. However, they believed that tail risks in Europe, such as the recent banking crisis in Cyprus, remained concerns. While the previous two Forums had been dominated by discussions of the US “fiscal cliff” and the potential drag on US GDP growth precipitated by severe spending cuts, the focus of the 1Q13 Forum shifted back to the role of fundamentals in driving market returns. In general, participants foresee a reasonable global growth outlook, with Europe a notable exception. One finding was that the geographic location of participants strongly influenced their levels of optimism, even more so than the asset classes they manage.
UBS Cyclical Market Forum 1Q13 Economic Scenarios Under Consideration
- Scenario 1, “Risk perpetuation”: A “muddle through” situation in which political uncertainty in the US and Europe weighs on the growth outlook, despite some encouraging economic developments in the US and China. In this scenario, European markets remain volatile, Japanese markets perform strongly based on more accommodative monetary policy and China continues to grow at a relatively strong pace.
- Scenario 2, “Risk habituation”: The most “risk-on” scenario, in which the US Congress agrees to a fiscal compromise with a minimal effect on growth, triggering gains in GDP due to a pent-up demand for spending by both corporations and consumers. In this scenario, problems in Europe diminish, and the eurozone returns to GDP growth in 2013. The Japanese economy improves due to aggressive monetary policy and rising demand, while China’s growth continues to accelerate.
- Scenario 3, “Risk annihilation”: The most bearish scenario, in which political gridlock in the US and instability in Europe lead to significant deceleration in the US and the eurozone. In this scenario, the US barely escapes recession, and European growth remains negative. In Japan, aggressive monetary policy is not enough to offset weakening demand, and the Chinese economy decelerates significantly.
Each scenario was intensely scrutinized. Nearly half of the Cyclical Market Forum participants voted Scenario 1 as the most likely, approximately one-third voted for the more bullish Scenario 2, and 20% voted for the bearish Scenario 3. There was a decided geographic split in terms of sentiment, with US-based investors significantly more bullish than participants based in the UK and Europe.