THE UBS GLOBAL ASSET MANAGEMENT Cyclical Market Forum, held quarterly to discuss three plausible economic scenarios and their potential implication for investments over the next 12 months, found its 2Q14 Forum dominated by discussions over continued strong market returns and low volatility levels across many asset classes, as well as concerns that potential negative shocks to the global economy have not been fully priced into the markets. Curt Custard, the chair of the Forum, said, "The marketplace seems more consensus-oriented than I've seen in a long time. A policy misstep from the central banks or a rise in geopolitical tension could rattle the currently benign environment."
Three market scenarios are proposed at each Cyclical Market Forum and are debated by UBS Global Asset Management investment teams across a wide variety of asset classes, including equities, fixed income, multi-asset portfolios, hedge funds, currencies, commodities and real estate. As of March 31, 2014, UBS Global Asset Management had approximately USD 674 billion in assets under management globally.
UBS Cyclical Market Forum 2Q14 Economic Scenarios Under Consideration
- Scenario 1 – "Carry on regardless" – In this consensus scenario, the global environment of subdued growth and low inflation continues. US growth continues to be mostly supported by consumer spending, while investment growth continues to disappoint. The European Central Bank's (ECB) new measures are not a quick fix for the eurozone's recovery, leading to modest GDP growth. Despite the occasional surge in geopolitical tension and some uncertainty within China's shadow banking sector, emerging markets continue their gradual rebalancing, which is supported by a relatively accommodative global monetary policy stance.
- Scenario 2 – "Carry on cruising" – In this bullish scenario, global recovery is led by strong growth in the developed markets. As business confidence remains strong and monetary policy stays accommodative, investment spending becomes the main driver of recovery within the developed markets. Upside surprises from both inflation and growth will significantly increase export demand from developed markets, which will benefit emerging economies. Despite a normalization of monetary policy in the US, capital outflows from emerging markets are still limited, as domestic growth, supported by stronger external demand from developed markets, remains robust.
- Scenario 3 – "Carried out" – In this bearish scenario, the expectation of stronger growth in developed markets never materializes. In the US, rising inflation and falling unemployment—driven primarily by lower labor market participation rates—signals to the market and the US Federal Reserve (Fed) that potential growth is much lower than pre-crisis levels. In the eurozone, the ECB's new measures prove insufficient to stimulate growth. China continues to deal with shadow banking problems, and other emerging markets are hit by lower external demand and reduced risk appetite.
A majority of the Cyclical Market Forum participants voted Scenario 1 as the most likely, the bullish Scenario 2 as the second-most likely and the bearish Scenario 3 as the least-likely outcome. In terms of asset class expectations, a clear majority of participants expected developed markets to outperform emerging markets in equities and currencies, while emerging markets debt was expected to outperform developed market bonds. The participants agreed that the outcomes for most asset classes will likely be significantly impacted by the actions of major central banks. In particular, attention was focused on the following aspects: 1) whether the ECB will increase its monetary easing policies or continue to rely on the Fed's policies to support the global recovery, 2) whether the Bank of Japan (BoJ) will tighten its monetary policies, or continue with economic stimulus as it has done under "Abenomics" and 3) whether the Bank of England (BoE) will adopt tightening measures to slow the economy, or risk building up a bubble, particularly in the housing market. While the market has priced in some of these actions, a surprise may throw off the markets and could lead to unexpected volatility.