Adrian Zuercher, Head Global Asset Allocation, UBS Chief Investment Office

CIO Insights featuring Adrian Zuercher, Head Global Asset Allocation, UBS Chief Investment Office

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As we welcome a new decade driven by mass structural changes, vaccine roll-out and economies poised to account for everything that 2020 ravaged, global investors have demonstrated a cautious approach to global markets in general. To help them make the right choices and understand trends that will shape the coming decade, we interviewed Adrian Zuercher, Head Global Asset Allocation, UBS Chief Investment Office. In this interview, Adrian Zuercher’s in-depth commentary and insights into markets, macro-economic indicators and investment ideas, could help investors unlock value in the coming decade.

Macro-economic indicators: Economies playing catch-up and a weaker dollar will be bolstered by vaccine roll-out and global stimulus initiatives

With the rollout of a coronavirus vaccine and continued monetary and fiscal stimulus – to enable corporate earnings to recover to 2019 levels by the end of the year, the world is set to slowly yet steadily return to pre-pandemic norms. At the same time, structural changes driven by the pandemic mean the world is accelerating into a transformed future. Firstly, the more economically sensitive markets and sectors will catch up in 2021, after underperforming in 2020.  Areas with most potential for “catch-up” include the more cyclically exposed Eurozone and UK markets, small- and mid-caps, and select financial, energy, industrial, and consumer discretionary stocks. Secondly, low interest rates could still persist, making it harder for investors looking for yield. Thirdly, a weaker dollar will be driven by higher US fiscal spending, a recovering global economy, and a diminished interest rate differential. In such a circumstance, investors should diversify across G10 currencies, into select emerging market currencies like INR or IDR, and gold. 

Geopolitics: The US-China stalemate to continue

The Biden administration’s bid to renew/repair the USA’s foreign relations is a tack that should improve relations with Europe in particular. Although the fundamental US-China geostrategic stalemate may continue in the near term, the new administration will be less likely to use tariffs as a tool of foreign policy. Additionally, this administration’s approach to not use tariffs as a policy tool should also be seen as a positive for the Chinese yuan. Further, reduced trade tensions should support the economic recovery, reinforcing our preference for cyclicals such as industrials. The shares of Chinese companies listed in the US could benefit from an end to—or at least less—delisting threats.

Asset Allocation: China, Korea and Singapore equities market continue to remain favourable

From cross-asset perspective, MSCI AxJ equities are favourable against High Grade bond. AxJ earnings revision breadth ratio further rebounded to 28% in Jan 2021. Further, the CIO bottom-up team revised the 2021 MSCI AxJ earnings growth to 28% in USD term or 22% in local currency term. On the heels of a strong rally since March 2020, certain parts of the market have become stretched on valuation metrics. With that said, Asia remains an attractive market compared with US for institutional investors and the deep value part is still at very reasonable valuations. On equity side, our most preferred equity markets are China, Korea and Singapore and our least preferred markets are Malaysia, Hong Kong and Thailand. As for fixed income, Asia High Yield and China Government bonds remain preferable. 

Investments: Emerging market equities and technology investments will unlock value for global investors

Global stocks returned 16% while US stocks returned 21% in 2020 against the backdrop of falling earnings and a deep economic recession. This has left them looking expensive on price-to-earnings ratio (P/E) metrics and has raised questions about the possibility of a bubble in equities when economies haven’t fully recovered. However, according to us, equities as a whole is not a bubble, and valuations can be justified in the context of low interest rates. With COVID-19 vaccine rollout set to support a broadening economic recovery, further upside for global equities can be expected. Specifically speaking, our focus is on equity exposure is away from some of 2020’s winners i.e., US mega-caps and more towards lowly valued emerging market stocks. Our preferences include global small and mid-caps, as well as select financial and energy stocks. Now delving into a specific sector; if the last decade was about investing in the technology sector itself, we think the next decade will reward investing in disruptors using technology in other sectors. “The Next Big Thing” in our opinion will materialise within the fintech, health-tech, or green-tech spaces, or at the least be enabled and accelerated by the global rollout of 5G technology.

The UBS Wealth Way: UBS devised an approach called “UBS Wealth Way” which focuses on three strategies – “Liquidity. Longevity. Legacy.” In the Liquidity bucket, short term bonds (1-yr Certificate Deposits) and high-yielding currencies (INR, IDR) are advised. In the Longevity part, portfolios should be re-tilted to add higher-yielding bonds (CGBs), stocks (EM value) and some previous laggards and promising regional markets (UK, Asia ex-Japan). For the Legacy bucket, private market debt and equity are recommended. Based on the above-mentioned strategy, we have shifted a higher allocation to the longevity strategy which a higher allocation to equities as it is our most preferred asset class.

Alternatives: Amid lower returns in developed market equities, investors are on the look-out for alternative sources of returns and diversification such as private markets and hedge funds. Private markets require long capital commitments, however expected returns of more than 10% per year in private equity are attractive. Meanwhile, funds of hedge funds are expected to return to approximately 3.6% (in USD) per year, over the long term.

 Real Estates: In a low interest rate environment, real estate remains an attractive investment for income generation. Real estate’s inflation protection characteristics may prove beneficial in a more indebted world. While city living or the office market in our opinion hasn’t been permanently impaired due to the pandemic, active private real estate strategies should provide better returns compared with low yield buy and-hold strategies.

 Buy into Sustainability: Green tech and impact funds are here to stay

With a quarter of a century’s experience in delivering ESG solutions globally, this key topic is a part of our DNA. With increased channels of communication, delivering key learning topics and concepts to our clients, all the while sharing latest industry developments and insights, UBS helps its clients understand the solutions and impact of ESG investing. In Asia, UBS is at the forefront of innovative and bespoke sustainable investing offerings. In 2016, UBS raised USD 471m for the UBS Oncology Impact Fund, an early-stage private equity fund focusing on investments in the development of cancer therapeutics in order to achieve attractive financial returns. USD 275m of the funds raised was committed by the investors here in APAC which accounts for over 50% of the fund. In addition, increased government, business, and consumer emphasis on sustainability, and exposure to several fastest-growing thematic research in the decade ahead, means sustainable investing is now a preferred approach for investing globally. Investment in green tech, through ESG leaders, in green bonds and in multilateral development bank bonds could further strengthen initiatives around sustainable investment.

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