2019 Will Bring Volatility, But No Recession, UBS Said in its year end report
The year will bring increased volatility but no recession, UBS predicts in its “2019 Year Ahead” outlook report.
Because of that, investors should stay invested and look for opportunities that the uncertain market will provide, the financial firm advised. On balance, overweight equity exposure, combined with relative value trades, and portfolio hedges is the right positioning for the start of 2019,” said Mark Haefele, CFO for global wealth management at UBS.
Global economic growth for the coming year will slow slightly to 3.6%, down from the 3.8% growth this year. At the same time, inflation will remain contained, UBS said.
The next Bearish market will be an average pull back, not the drastic correction or recession that were seen in the last 20 years, the firm said.
“In comparison to the extreme equity valuations of 2000 leading to the dot.com bust, or the financial sector leverage that prevailed in 2007, the excesses this time appear more contained. We believe that the next equity Bear market is likely to be an average Bear, with a 22 to 30 drop for global equities from the market peak,” the report said.
Investing for this year should be diversified across countries, sectors and market drivers in order to withstand worldwide political factors including the US-China trade negotiations, the Italian budget and BREXIT, the firm said.
“Look for value and quality. We expect US and emerging market value stocks to outperform growth stocks, reversing their 2018 under-performance. Meanwhile quality companies with higher profitability, lower financial leverage, and less earnings variability than average should withstand volatility better than the overall market,” the report said.
UBS said an attractive policy now is an equity buy-write strategy, which involves purchasing a stock or basket of stocks while systematically selling Call options on the positions.
“Over an economic cycle, equity buy-write strategies generate attractive risk-adjusted returns, as they capture both the equity and volatility risk premiums. They are most appealing in current market conditions, when volatility is higher and prospective equity returns are moderate,” the report said.
For particular sectors, financials may be set up to outperform in the US and China, and energy will offer value in the US and Europe, with Crude Oil prices poised to recover in early 2019, UBS said.
Have a Happy New Year!
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