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 3Q13 Forum dominated by discussion of the lack of tapering by the US Federal Reserve (Fed) and heated debate about whether problems in emerging markets could lead to contagion in developed markets, similar to events of the late 1990s. While the lack of Fed action led to a short-term rally for risk assets, Curt Custard, the chair of the Forum, said, “If the Fed continues its ‘lower for longer’ approach, and that becomes priced into markets, this seems like a rich environment for asset class bubbles to form.” Three market scenarios are proposed at each Cyclical Market Forum and are debated by UBS Global Asset Management (UBS) investment teams covering equities, fixed income and alternative asset classes, including real estate, commodities and currency. UBS Cyclical Market Forum 3Q13 Economic Scenarios Under Consideration
- Scenario 1 represents a consensus scenario, in which the global economy continues on a slow but steady growth path, with the US and Japan leading the recovery. In this scenario, emerging markets continue to suffer due to a reduction in liquidity, but begin to recover next year. The eurozone continues a subdued recovery, with growth hampered by the need for ongoing deleveraging. Inflation remains tame in developed markets, but continues to pose problems in several emerging countries.
- Scenario 2 represents the most bullish scenario, in which a very strong US economy leads to widespread global confidence and a return to broader risk-taking sentiment. In this scenario, the US economy is propelled by strong consumer spending and a robust housing sector, while the European debt situation dramatically improves, including in the periphery. Although emerging markets continue to feel the effects of decreased liquidity, growth returns by the beginning of next year.
- Scenario 3 represents the most bearish scenario, in which problems in several emerging markets trigger problems in developed markets, leading to significant global disruptions, particularly for emerging economies and the eurozone. Weaker demand for commodities leads to negative outlooks for significant commodity exporters, such as Russia and Brazil. The US continues to grow modestly due to resilient domestic demand, but the rest of the developed world sits on the verge of stagnation.
Key Takeaways from the Forum:Curt Custard, Head of Global Investment Solutions, Chair of the Cyclical Market Forum (Chicago) “Fundamentals are no longer driving prices—politicians are driving prices. Fed policy is the most important aspect for markets, not just in the US, but across the globe. The tail risks we talked about a year ago—eurozone sovereign debt, a slowdown in China, a policy mistake—haven’t really gone away, but it seems like the market has decided to focus its attention elsewhere.” Michele Gambera, Head of Quantitative Analysis, Global Investment Solutions (Chicago) “There are significant differences in the outlook for individual emerging market economies. Some countries should remain in solid shape, but several others are running high trade deficits, which exposes them to risks if liquidity decreases. If one of these large countries gets into a situation where they cannot generate growth by devaluing their currency due to a lack of long-term competitiveness, it might have an avalanche effect that pulls down other players that have no business being pulled down, other than a market flight to quality.” Comments on Specific Asset Classes: Scott Dolan, Co-Head of US Multi-Sector Fixed Income (Chicago) “I believe that we are in the early stages of a change in the interest rate cycle. The Fed's lack of tapering in its September meeting gives me further confidence that it will not risk a further tightening in financial conditions and will continue to trade credibility in favor of the potential for fostering economic growth and job gains. The Fed's strategy comes with risks, as the desired outcome of stronger economic growth sooner rather than later may lead to a less desirable reversal in monetary policy in a shorter time period than what’s currently being signalled." Uta Fehm, Portfolio Manager, Emerging Markets Debt (Frankfurt) “The emerging markets situation seems very different from 1997 and 1998. The emerging countries are not nearly as dependent on the US dollar and US rates as they were during the Asian crisis in 1998. Today, there are extremely liquid local currency markets in many countries, and many countries are in much stronger fiscal shape and have higher reserves than during the late 1990s. There are only a few countries with significant problems, and overall, I see the risks of contagion as much lower than in the past.”
Elisabeth Troni, Global Real Estate Strategist (London)“In my view, the case for real estate remains strong, particularly as income-producing assets remain elusive for investors. We increasingly see investors moving from low- to higher-yielding strategies, which we expect to outperform on a risk-adjusted basis. On the emerging markets front, Chinese real estate is trading at attractive valuations not seen in some time, and should attract investors who can tolerate near-term volatility.” 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 586 billion (EUR 477 billion, GBP 408 billion, USD 621 billion) at 30 June 2013. 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 ForumAssessing 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.