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.
Key Takeaways from the Forum:Curt Custard, Head of Global Investment Solutions, Chair of the Cyclical Market Forum (Chicago) “It’s remarkable how US-based investors are so much more bullish than their European counterparts. The regional split seems to matter even more than the traditional different viewpoints between stock and bond investors. Even fixed income investors—not always the most bullish group—based in the US are far more optimistic about the world as a whole than equity investors based in London and other parts of Europe.” Joshua McCallum, Senior Fixed Income Economist (London) “Even with the uncertainty in Cyprus, markets did not react too negatively. This outcome may signal that investors are undergoing risk habituation and are focusing on fundamentals, such as earnings, rather than larger macro events. These developments could mean a return to markets that appear more normalized, but the danger is that risk habituation in markets takes the pressure off the politicians, which could create troubles in the future.” Comments on Specific Asset Classes: Bruno Bertocci, Global Equity Strategist (Chicago) “We see positive support for equity markets. We’re quite bullish on the US economy, especially as the housing market continues to recover, which could create jobs and further lift consumer sentiment. We’re less positive on the European economy, but there could be significant value in export-driven companies there— especially those that export primarily to the much-stronger US and China markets.” Uta Fehm, Senior Portfolio Manager, Emerging Markets Debt (Frankfurt, Germany) “None of the scenarios would be highly beneficial for USD-denominated emerging markets debt. In the ‘muddle-through’ Scenario 1, there could be high volatility for the asset class, with returns much lower than in 2012, but still positive around the coupon level; the ‘risk-on’ Scenario 2 would likely be supportive for emerging markets debt from a spread point of view, but higher US Treasury yields could at least partly jeopardize spread returns; and the ‘risk-off’ Scenario 3 would likely lead to significant losses for the asset class due to spread widening.”
Mike Lammers, Strategist, US Core/Value Equities (Chicago)“We feel Corporate America is pretty strong, and we see a positive outlook for US equities in 2013. This belief is supported by pent-up demand for capital spending by corporations, and an increasingly robust housing market. As a result, we could see both earnings growth and multiple expansion—a combination that would act as a strong tailwind for equity markets.” UBS Global Asset Management is a large-scale asset manager with well-diversified businesses across regions, capabilities and distribution channels. It offers investment capabilities and investment styles across all major traditional and alternative asset classes. These include equity, fixed income, currency, hedge fund, real estate, infrastructure and private equity investment capabilities that can also be combined into multi-asset strategies. The Fund Services unit provides professional services including legal fund set-up, accounting and reporting for traditional investment funds and alternative funds. Invested assets worldwide totalled some CHF 581 billion (EUR 481 billion, GBP 391 billion, USD 634 billion) at 31 December 2012. The firm is a leading fund house in Europe, the largest mutual fund manager in Switzerland and one of the largest fund of hedge funds and real estate investment managers in the world. With around 3,800 employees, located in 24 countries, we are a truly global firm. Our principal offices are in London, Chicago, Frankfurt, Hartford, Hong Kong, New York, Paris, Singapore, Sydney, Tokyo and Zurich. The information and opinions contained herein are a reflection of UBS Global Asset Management’s best judgment based on current market assumptions and are considered forward-looking statements. Any obligation to update or alter forward-looking statement as a result of new information, future events, or otherwise is disclaimed. There is no assurance that these projections will ultimately be realized. Actual future results may prove to be different from expectations. About the Cyclical Market Forum Assessing the economic and market environment is a key part of UBS Global Asset Management’s investment strategy-setting process across all investment areas. Our Cyclical Market Forum, open to representatives of all investment teams, regularly debates important economic and market themes and their potential impact on our investment strategies. The Forum’s purpose is to examine the main economic and market drivers – typically through scenario analysis over a 12- to 18-month time horizon – and to foster debate between the teams managing different asset classes. The three economic scenarios discussed should not be considered forecasts.
The way in which the output from the Forum is used varies across UBS Global Asset Management’s investment teams and it is just one of a number of inputs into each team’s investment process. One of the key benefits of the Cyclical Market Forum is the opportunity to exchange research and viewpoints from the various investment specialists and to examine the intersection between top-down and bottom-up drivers. As such, it broadens the input into our strategy-setting process in a structured format.www.ubs.com/media