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 4Q13 Forum dominated by discussion over the continued effects of central bank activity on asset prices. While most of the participants had a positive outlook for risk assets in 2014, there was debate about whether there was too much optimism for the year ahead. Curt Custard, the chair of the Forum, said, “My big worry is that markets have not priced in the chances of a policy error, which is a very real threat."
Three market scenarios are proposed at each Cyclical Market Forum and are debated by UBS Global Asset Management (UBS) investment teams managing approximately USD 642 billion globally, as of September 30, 2013. Participants included investment teams covering equities, fixed income, multi-asset portfolios, hedge funds, currencies, commodities and real estate.
UBS Cyclical Market Forum 4Q13 Economic Scenarios Under Consideration
- Scenario 1 –"The song remains the same" – represents a consensus scenario, in which global growth remains modest, while inflation remains subdued. The world remains in low gear, with industrialized countries closer to their trend growth and emerging countries lagging their (higher) trend growth rates. This scenario is supportive for most global asset classes, as growth is low enough to maintain accommodative policy in many regions, but high enough to continue recovery from the financial crisis.
- Scenario 2 – "The party gets going" – represents the most bullish scenario, in which growth is closer to historical trends for all industrialized countries except for the eurozone. Emerging countries take advantage of the ensuing export opportunities, but still grow below the speeds experienced in the last 20 years. The US and Japan are the stars of this growth episode, which gradually allows peripheral European countries to get back on their feet, thanks to more supportive monetary policies. This scenario is strongly positive for developed and emerging markets equities, while fixed income in developed markets would likely produce negative total returns.
- Scenario 3 – "European policy mistakes spoil the party" – represents the most bearish scenario, in which actions by the European Central Bank (ECB) or other institutions lead to a return to recession in Europe, where inflation falls close to zero. The effects of a slowdown in Europe spill over to other regions, leading to negative returns for both developed and emerging markets equities, and mixed results for fixed income and alternative asset classes.
A majority of the Cyclical Market Forum participants voted Scenario 1 as the most likely. The bullish Scenario 2 was voted as the second-most likely, while the bearish Scenario 3 was seen as the least likely outcome. In terms of asset class expectations, a clear majority of participants expect developed markets to outperform emerging markets in equities and in currencies, while emerging markets debt was expected to outperform developed market bonds. The participants agreed that the outcomes for most asset classes would be significantly impacted by the actions of central banks, particularly the US Federal Reserve (Fed), the European Central Bank (ECB) and the Bank of Japan (BoJ), which are all on different trajectories in terms of tightening or expanding accommodative policies.