ubs house view
TRANSCRIPT
This report has been prepared by UBS AG. Please see important disclaimers and disclosuresattheendofthe document.
UBS House ViewMonthly Letter 24 February 2022
ChiefInvestmentOfficeGWMInvestment Research
Ukraine
ConflictbetweenRussiaandUkraine,andtheeffectofsanctions, mean volatility is set to continue. But we think it is unlikely energy supplies will be disrupted.
Inflation
Inflationisrunningatmulti-decade highs, but we expect it to peak soon and trend back toward central bank targets by year-end.
Fed
Market expectations point to a front-loadedtighteningcycle,but we don’t expect policy rate increases to derail the economic recovery.
Asset allocation
Against a backdrop of heightened uncertainty, we think now is a time for investors to be more selective, consider portfolio hedging, and seek longer-termopportunity.
The testF.ScottFitzgeraldoncesaidthat“thetestofafirst-rateintelligenceistheabilityto holdtwoopposingideasinmindatthesametimeandstillretaintheabilitytofunction.”Hemightalsohavesaidthatthisisthetestofafirst-rateportfolio.
Investorshavefacedmultiplenegativeheadlinessofarin2022.Inflationhascon-tinuedtorise,andpricepressuresarebroadening.TheFederalReservehasshiftedits focus away from stimulating economic recovery and toward managing prices. A flatteningyieldcurvehasheightenedfearsofrecession.Mostrecently,conflicthas broken out between Russia and Ukraine.
All of this speaks in favor of reducing exposure to equities, especially when the recentsell-offinbondmarketshasincreasedtheappealoffixedincomeinvest-ments.
Butatthesametime,growthremainsabovetrendandvariouseconomiesareliftingCOVID-19restrictions.Supplychainpressuresareeasing.WearelikelyclosetoapeakininflationintheUS.Chinahasstartedaddingmorestimulus.Financialcondi-tions are still loose in an absolute sense, and market expectations are for Fed policy rates to peak only at around 2%—this is hardly a “Volcker shock,” when the Fed hikedratesto20%tosubdueinflation.Meanwhile,sofar,Russianoilandgassup-pliesremainmostlyunaffectedbytheconflict.
Markets have also not ignored the risks: They now assume between seven and eight 25-basis-pointUSinterestratehikesoverthenexttwoyears.Price-to-earningsratiosforglobalequitieshavefallenby9%inthepasttwomonths,andinvestorsentiment, as measured by the American Association of Individual Investors’ bullish sentimentsurvey,isclosetoitsworstsince2016.
Sohowdowecontinuetobuildrobustportfolioswhenwefacemagnifiedupsideand downside risks and the beginning of a new central bank policy regime, and amid geopolitical turmoil?
Mark HaefeleChiefInvestmentOfficerGlobalWealthManagement
Follow me on LinkedInlinkedin.com/in/markhaefele
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First, we don’t think this is a time to be outright negative on equities—sentiment is already poor, at least some of the risks have been priced in, and a combination of above-trendglobalgrowthandfallinginflationcouldquicklymakethepicturelookmore favorable for investors.
Second, we think this is a time to consider implementing portfolio hedging strate-gies:WecannotexcludethepossibilityofhigherinflationexpectationsforcingtheFed to become outright restrictive in its monetary policy. Nor can we dismiss the chanceofadisruptiontoglobalenergymarketsstemmingfromtheRussia-Ukrainesituation.
As such, it makes sense to take some steps to prepare portfolios, initially by ensuringtheyarewelldiversifiedgeographicallyandacrossassetclassestomitigateidiosyncraticrisk,andsubsequentlybyconsideringspecificgeopoliticalhedges,including commodities.
Third, we think this is a time to be more selective about exposure within the mar-ket. Oil and energy stocks should perform well in the event of further escalation in geopoliticaltensions,butwealsoexpectthemtodowelliftheUkraineconflictsub-sides.WealsoseeChineseequitiesasattractiverelativetootherAsianmarkets,given their exposure to economic recovery and lower valuations. Their relative insu-lationfromrisingUSinterestratesandWesterngeopoliticalriskalsomeanstheyprovideappealingdiversificationbenefitsinaportfoliocontext.
In the rest of this letter, I explain our latest base case view on the key market driv-ers:inflation,theFed,andtheRussia-Ukrainesituation;explainwhywearemorepositivethansomeoftheworst-casescenariosoutthere;andconsiderthedatathatcould drive us to change our views in the months ahead.
Russia-Ukraine
Background and our risk caseAtthetimeofwriting,sanctionsimposedbyWesternnationshavebeenlimitedtoselectfinancialinstitutions,issuanceofsovereigndebt,andahalttotheapprovaloftheNord Stream 2pipeline,thoughweexpectmoresanctionstomaterializeinthecoming days.
Wedon’tthinkthisisatime tobeoutrightnegativeonequities;sentiment is already poor, and some of the risks have been priced in.
Heightened fears of wider militaryconflictinUkraine have prompted increased market volatility.
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Markets have not ignored the downside risksFigure 1
AAII US Investor Sentiment Bullish minus Bearish Readings, S&P 500 forward P/E (rhs)
30 23
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21
20
19
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10
0
–10
–20
–30
Source: Bloomberg, UBS, as of February 2022
AAII Bull – AAII Bear S&P 500 forward P/E (rhs)
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Inourview,thelimitingfactoronPresidentVladimirPutinwillnotbeWestern sanctions themselves but his own assessment of the costs of a wider campaign in terms of resources, Ukrainian resistance, and political support at home in the event ofwiderconflict.
The risk case is that the crisis remains a source of continued volatility for an extended period until a new point of stalemate is reached. The extreme risk case, whichwewoulddefineasonethathasalastingandmaterialnegativeimpactonglobalgrowth,isthattheconflictescalatestoalevelthatpushesWesternnationstoacceptdisruptiontoRussia’senergyflow.
Mutual interests to keep energy flowingWhileitishardtopredictthepotentiallimitsontheconflict,wethinkthatPresidentPutin has a strong interest in continuing to sell energy and other commodities to Europe, which has a strong interest in continuing to buy them.
Russia’s energy sector accounted for close to 20% of Russian GDP and 40% of fiscalrevenuesin2019.Europewouldsufferprofoundconsequencesfromadisrup-tion, given its reliance on Russian oil and gas and other commodities for its manu-facturing sector. And for the US, the risk of higher energy prices may not sit well against a backdrop of already sliding approval ratings for President Joe Biden in a midterm election year.
As such, in our base case, we think that President Putin continues to destabilize Ukraine and its government through a variety of tactics, but for those tactics to fall shortofwhatmighttriggerenergysanctionsbytheWest.
Moregenerally,itisalsoworthnotingthatrisk-offeventslinkedtogeopoliticalturmoilhavehistoricallytendedtobeshort-lived,withthegreaterrisktoinvestorscomingfrompanicsellingorunder-diversifyingratherthanactualeventsontheground.
What we are watchingEnergy prices will be a key factor to watch as events unfold. In most of our scenar-ios, we do not expect to see a disruption to energy supplies, but if oil prices were to risetoUSD125/bblorhigherfortwoquarters,itwouldresultinroughlyhalfaper-centagepointloweringlobalGDPgrowth,andhigherinflationaffectingconsumerspending power.
A prolonged move in oil prices aboveUSD125/bblwouldmake us more cautious.
1990 1993 1996 1999 2002 2005 2008 2011 2014 2017 2020
'91: First Gulf War
'01: 9/11 attacks
'03: Iraq war
'11: Intervention in Libya
'14: Ukraine conflict
'14: Intervention in Syria
'17: Airstrike on Syrian airbase
'99: Kosovo bombing
'16: Brexit vote
The market impact of geopolitics tends to be short-livedFigure 2
S&P 500 index; shaded areas indicate US recessions
5,000
4,000
3,000
2,000
1,000
0
Source: Bloomberg, UBS, as of February 2022
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ShouldRussia’senergyflowbedisrupted,higherriskpremiumsandlowerglobalearningsestimateswouldlikelytriggermorelong-lastinglossesforequitymarkets.
Inflation
Inflation data has surprised to the upsideInflationhascontinuedtohitmultiyearhighsinthefirstweeksof2022:Inthe12 monthstoJanuary,USCPIhit7.5%,a40-yearhigh;Eurozoneconsumerpricestouchedarecord5.1%;andUKCPIwas5.5%,athree-decadehigh.
Dataalsosuggeststhisisnotpurelyaproductofpandemic-relatedfactors,andprice pressures may be getting more deeply rooted. The Atlanta Fed’s Sticky CPI index,whichfocusesonpricesthatdonotchangeoften,roseto4.2%year-over-yearinJanuaryfrom3.7%inDecember.Servicesinflation,whichisnotsubjecttothesamepandemiceffectsasgoodsinflation,hasrisenabove4%.Andaveragehourlyearningsgrowthroseto5.7%inJanuary,from4.7%inDecember,poten-tiallysuggestingthebeginningsofawage-pricespiral.
We think inflation will peak soonWhiletheinflationdatareleasedsofarin2022doespointtoaheightenedriskofstagflation,westillthinkitismostlikelythatheadlineinflationwillpeakwithinthenext one or two months.
First,past-yearcomparisonsshouldsupportareductioninheadlineinflationrates.In particular, the rate of increase in used car, fuel, and gas prices should all begin to slow or reverse. It’s also worth noting that, generally, the items that have experi-encedthehighestratesofinflationoverthepastyeararealsothesameitemsthathave tended to experience less “persistence” in their price movements over the past two decades.
Second,thewidespreadliftingofCOVID-19-relatedrestrictionsshouldeasesupplychain backlogs. Data is already showing that semiconductor shipments, auto pro-duction,andshippingvolumesareincreasing;PMIsurveyssuggestthatinventoriesaregrowing;andsupplierdelaytimesaredecreasing.Aswellasbeingpositiveforgrowth, this should reduce upward pressure on prices.
Inflationisrunning atmulti-decadehighs.
Westillthinkitismostlikelythatheadlineinflationwillpeakwithinthe next one or two months.
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Sticky prices are rising in the USFigure 3
Atlanta Fed Sticky CPI, 12 months, US CPI year-over-year, in %
8
7
6
5
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3
2
1
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Source: Bloomberg, UBS, as of February 2022
Atlanta Fed Sticky CPI, 12 months, in % US CPI YoY, in %
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Third,ashiftinconsumptionpatternsawayfromgoodsandtowardservicesshouldhelpreduceinflation.Althoughservicesinflation,drivenbytightlabormarkets,isacauseforconcern,thiscouldalsobeeasedifacombinationoflooserCOVID-19restrictions,renewedimmigration,andreducedwealtheffects(duetoflatstockmarkets and less stimulus) boost the size of the labor force.
Overall,inourbasecase,weexpecttoseeinflationpeakwithinthenexttwomonths,beforefallinggraduallybacktoward2–3%bytheendof2022.Wethinkthisshouldbesufficientformarketconcernsaboutinflationtograduallyebb.
What could lead us to become more cautiousSomeofthemostcriticaldatatowatchtoconfirmorchallengeourviewincludewagegrowth,servicesinflation,andthecostofshelter.Iftheseindicatorsstayele-vated,oracceleratefurther,itcouldsuggestthatinflationisprovingmorepersistentthan our base case expectations.
Totheextentthatanimprovementinsupplychainissuesisadriveroflowerinfla-tion,wewillalsoneedtomonitorCOVID-19policyinEastAsia.China’szero-toler-ance policy continues to create the risk of sudden closures to factories or ports in key exporting regions for the global economy.
The Fed
Markets have repriced the path for ratesJust two months ago, the market expected that US interest rates would increase by 63bpsin2022andafurther70bpsin2023,beforeeventuallyreachingaterminalrateof1.9%fiveyearslater.
ButfearsaboutinflationhaveledtheFedtomakeasignificantshiftinitsexpectedpolicypath.Now,marketsarepricing1.5%ofhikesin2022and0.5%in2023—asignificantlyfasterpathtoamarket-pricedterminalrateof2%.(Fedprojectionsforthelonger-termfederalfundsrateremainhigherat2.5%.)Meanwhile,thelatestFOMCminutessuggestthat“asignificantreductioninthesizeofthebalancesheet” may also be necessary.
Wearewatchingwagegrowth,servicesinflation,andthecost of shelter for signs of more persistentinflation.
Fearsaboutinflationhaveled theFedtomakeasignificantshift in its expected policy path.
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Markets believe Fed hikes will be done within 12 monthsFigure 4
US cash rate expectations, one, two, three years from now, in %
2.5
2.0
1.5
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–0.5
Source: Bloomberg, UBS, as of February 2022
1Y 2Y 3Y
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Tighter Fed policy concerns equity market investors for at least three reasons:
First,theFed’sshiftinfocusawayfromsupportinggrowthandtowardmanagingprices likely also implies that the US central bank will be less sensitive to a weaker economicoutlookorheightenedfinancialmarketvolatility.This“lowerstrikeontheFed put” increases the inherent risk in equities.
Second, investors fear that the Fed might drive the economy into recession as it triestomeetitsinflationgoal—aworryreflectedinanincreasinglyflatyieldcurve.Aninvertedyieldcurve(inwhichshort-terminterestratesriseabovetheyieldonlong-termbonds,typicallymeasuredbytwo-yearversus10-yearmaturities)haspre-cededallrecessionssince1976.
Third,higherinterestratesoncashandhigh-gradebondsincreasetheirappealandcoulddriveanequity-to-bondrotationiftheybecomesufficientlyattractive.
Concerns about higher rates may be overstatedHistorytellsusthatFedtighteningofteneventuallyleadstoarecession.ButhistoryalsotellsusthatmarketsoftencontinuetorallyaftertheFedstartstightening.Since1983,inthesixmonthsfollowingthefirstFedratehikeofacycle,theS&P 500onaveragehasgained5.3%.
In addition, we have reason to believe that, while higher interest rates do typically have a negative impact on economic growth, it may not hold as true this time around. Higher interest rates usually harm growth by constraining demand. But in thiscycle,demandisalreadyconstrainedbysupplyissuesandresidualpandemic-relatedrestrictions.So,whilehigherinterestratesmayaffectpotentialdemand,ifsupply challenges ease, economic activity could continue to rise regardless.
Furthermore, this Fed under Jerome Powell is hardly a Volcker Fed. Despite headlines ofinflationspiralingoutofcontrol,marketsexpectlonger-terminflationtostaylowevenwitharelativelymodestpeakininterestrates.Marketsarecurrentlyprojectingthatapeakinterestrateof2%inthemiddleofnextyearisconsistentwithinflationaveragingjust2.5%overthemediumtolongterm(basedonfive-year,five-yearforwardinflationexpectations).Witharealinterestrateof-0.5%,thiswouldstillbequite accommodative policy in an absolute sense.
And on valuations, with bond yields rising, equities have indeed gotten less attrac-tive in relative terms. Yet the yield gap—the inverse of the P/E ratio minus the 10-yearbondyield—isstillaboveitslong-termaverage,at3.6%versus3.3%.Soistheglobalequityriskpremiumbasedonadividenddiscountmodel,at5.6%versus4.4%. This suggests that equities will likely outperform bonds.
At present, market pricing assumes around six interest rate hikes in 2022 and a further one to two in 2023, but it is worth noting that investors and markets have historicallytendedtooverestimatetheconsistencyanddurabilityofrate-hikingcycles—1994and2009–10areclearexamplesofthis.
IftheFedbeginshikingratesandinflationstartstocomedownasweexpect,wecould still end 2022 with a Cinderella story of a Fed that went from “behind the curve” to “threading the needle” of balancing its mandates of full employment and price stability.
Marketsoftencontinue torallyaftertheFedstarts tightening.
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What could lead us to become more cautious?Onekeyrisktoourviewisthatlonger-terminflationexpectationsbegintorise,whichwouldbeasignthatmarketsarestartingtoworrythattheprojectedinterestratepathcouldbeinsufficienttomanageinflationarypressures.Thiscouldmeanthe Fed has little choice but to hike rates more aggressively, and the increased risk ofaFed-inducedrecessionwouldmakeusdemandahigherriskpremiumfromequities.
Analternativeriskisthatlonger-terminflationexpectationsstaycontained,buttheyonly do so because the market fears that the Fed is driving the economy into reces-sionwithoverlytightpolicy.Wecanmonitorthisriskbyfocusingontheshapeoftheyieldcurve.Ifweseeshort-terminterestratesrisemeaningfullyabovelong-termrates, it could indicate that the market fears recession ahead. The spread between 2-yearand10-yearUSTreasuryyieldsiscurrently40bps,stillinpositiveterritorybutthe narrowest since August 2020.
Our investment scenarios
Consideringalltheabovefactors,wehaverevisedourend-2022targetsforvariousequity markets. Our forecast revisions for our base case are based on the following assumption changes:
– Wehaveraisedourestimatefor10-yearbondyields.Wenowexpectthe10-yearUSTreasuryyieldtoend2022at2.3%,from2.1%.AlthoughestimatesofthepaceoftheFed’stighteninghaveincreasedsubstantially,whilelonger-terminfla-tion expectations stay low and geopolitical uncertainty persists, we think the upsidetolonger-termyieldsisrelativelylimited.Allelseequal,theincreaseinouryield forecast reduces our estimate of fair P/E valuations for equity markets by 4% based on an earnings yield model.
– Wekeepourestimatesfor2022and2023corporateearningsunchanged,givenourexpectationthatgrowthwillremainabovetrendthisyear,inflationwillfallback, and geopolitical tensions will subside by year end.
– Wemaintainouryear-endestimatefortheequityriskpremium.Relativetoourlastupdate,webelievethatintheuncertaintyassociatedwithinflation,growth,monetary policy, and geopolitics have all risen, warranting a higher risk premium in the short term. But we believe these factors will recede by the end of 2022, leavingourforecastat290bps.
Althoughwerevisedownourforecasts,westillprojectdoubledigitpercentagereturns for the S&P 500 and the Euro Stoxx 50 and 4% upside for the MSCI Emerg-ing Markets index. However, given the degree of uncertainty in the current environ-mentwehaveloweredourdownsidescenariopricetargetsmoresignificantly.
At a time of elevated risks and ahead of a potential slowdown in growth later in the year,itcanbehardtoenvisagemeaningfulmarketupside.Butmoderatinggrowthmomentumneednotpresentaproblemforstocks:Since1960,whentheISMmanufacturingindexhasbeenbelowitspreviousthree-monthaverage,butstillabove55,subsequent12-monthreturnshaveaveraged10%.
In addition, when solid business momentum is combined with low investor sentiment, equitygainshistoricallyhavebeenstrong.Since1987,whentheAAIInetbullishsentimentreadinghasbeenbelow21%andthemanufacturingISMabove55,S&P 500returnsinthenext12monthshaveaveragedmorethan20%(comparedwithanaveragereturnof10%forallperiods).
Risinglonger-terminflation expectations or signs of a Fed-inducedrecessionwould make us more cautious.
Wehaverevisedupour bond yield forecasts, but see further equity upside from current levels.
Solid business momentum combined with weak sentiment has proved positive for equities in the past.
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Keyscenariosandassetclassimpact
Upside Central Downside
Scenarios Inflation / central banks
Growth
COVID-19
China
Geopolitics
Inflationfearsabate.Majorcentral banks gradually reduce accommodation, but less than the market expects.
Growth stays well above long-termtrend.
ThenextCOVID-19variantbecomes indistinguishable from the common cold.Developed countries follow the Denmark example and removeallCOVID-relatedrestrictions by 2H 2022.
COVID-relatedrestrictionsstarttobeliftedaftertheWinterOlympics.Regulatorycrackdown and property market issues ease.
Quickde-escalationoftheUkraine crisis.
USinflationtopeakin1Hbefore gradually falling toward 2% by late 2022. Majorcentralbanksreduceaccommodation, but policy remains accommodative. TheFedfinishestaperbyMarch, raises rates in line with market pricing, and starts quantitative tightening in 2022.
Growth slows down gradu-ally but remains above trend in 2022.
GradualshiftfrompandemictoendemicCOVID-19con-tinues, allowing countries to continue reopening their economies.
Chinese growth stabilizes. Central bank support contin-ues.COVID-relatedrestric-tionsstarttobeliftedin2H.
Escalation in Ukraine does not lead to a disruption of Russian energy supply to Europeorasignificantandprolonged spike in energy prices.
Inflationremainshighforlonger. Energy prices remain elevatedatleastuntilmid-2022. The Fed hikes more than the market expects and starts QT at an accelerated pace.
Global growth slows down-and remains below trend throughout 2022 amid aggressive monetary tighten-ingbymajorcentralbanks.
ThenextCOVID-19mutationis more severe than omicron.Consumption does not fully recover due to continued public fear.
China fails to contain omi-cron. Economic reopening is delayeduntilafterthePolit-buro meeting in November.Morebroad-basedpropertymarket crisis or further regu-latory tightening further weighs on growth.
Further escalation of the Ukraine crisis leads to a dis-ruption of Russia’s energy supply to Europe and a sharp spike in energy prices, with BrentholdingaboveUSD 125/bblforatleastsixmonths.
Asset class impact
(forecastsforDecember 2022)
Spot*
S&P 500 4,179 5,100 4,800 3,700
EuroStoxx 50 3,817 4,600 4,300 3,400
MSCI EM 1,207 1,350 1,250 1,000
USD IG spread** 94 45bps/+1% 80bps/+1% 150bps/+2%
USD HY spread** 372 270bps/+6% 350bps / +4% 550bps/–1%
EMBIG spread** 414 300bps/+6% 370bps/+4% 550bps / –3%
EURUSD 1.11 1.20 1.13 1.07
Gold 1,927 USD1,400–1,500/oz USD1,700/oz USD1,900–2,000/oz
* Spot prices as of 24 February 2022**Duringperiodsofmarketstress,creditbid-offerspreadstendtowidenandresultinlargerranges.Percentagechangesrefertoexpected
total return(t.r.)fortheindicatedspreadlevels
Note:Assetclasstargetsaboverefertotherespectivemacroscenarios.Individualassetpricescanbeinfluencedbyfactorsnotreflectedinthe macroscenarios
Source: UBS, as of February 2022
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How to invest
Asreflectedintheaboveforecasts,wedon’tthinkthisisatimetobeoutrightnega-tiveonequitymarkets.Particularlyforinvestorswithalonger-termperspective,stay-ing invested and focusing on incremental portfolio changes are key.
Overall,wethinknowisatimeforinvestorsto:a)bemoreselective;b)considerportfoliohedging;andc)seeklonger-termopportunity.
Mark HaefeleChiefInvestmentOfficerGlobalWealthManagement
Wedon’tthinkthisis a time to be outright negative on equity markets.
Action Investment idea
Be selective in equity market exposure
Buy the winners from global growth
Againstastill-stronggrowthbackdrop,wecontinuetofavorvalueandcyclicalsectorsandmar-kets,includingenergy,financials,andEurozonestocks,alongwithbroadcommodities.CurrentuncertaintiesabouttheeffectofUkraine-Russiatensionsonenergysupplymeanthatenergystocks and commodities can also play a key role in portfolios as a geopolitical hedge.
Seek opportunities in China
WelikeChineseequitiesrelativetoothermarketsinAsia.Policyiseasing,growthislikelytoaccelerate into the second half of the year, valuations are relatively attractive, and earnings growth is improving. Furthermore, the market is relatively well insulated from key global risks––geopoliticsandrisingUSinterestrates––makingitanappealingdiversifierinaportfoliocontext.
Consider portfolio hedging
Prepare for rising rates
Thefinancialsectortypicallybenefitsasratesrisethankstohighernetinterestincome.Wewould also expect value sectors to outperform growth sectors, such as technology, which face thegreatestheadwindsfromrisingrates.Infixedincome,weseeUSseniorloansasofferingsomeprotectionfromrisingratesduetotheirfloating-ratestructure.
Build up some defense
Withuncertaintysettoremainelevated,investorscanconsiderbalancingsomeoftheircyclicalexposures with defensive sectors and strategies. Global healthcare is our preferred defensive sector, and we also see dividend strategies, dynamic allocation strategies, and the use of struc-turedsolutionsaspotentiallyattractivemeansofimprovingtherisk-returnprofilesofoverallportfolios.
Position for US dollar strength
Thedollarisa“safe-haven”currencythattendstorallyincaseofheightenedgeopoliticaluncertaintyor“risk-off”sentimentinfinancialmarkets.Inaddition,wethinkthatexpectationsof US interest rate hikes this year are likely to support the dollar in the months ahead. As such, we see the US dollar as an attractive tactical currency position at present.
Diversify with alternatives
Diversifyingbeyondstocksandbondscanhelpreduceoverallportfoliovolatility.Wefavorexpo-sure to hedge funds, as well as other alternatives including private markets, global direct real estate, and structured investments.
Seek longer-term opportunity
Position for the net-zero carbon transition
Investing in traditional commodities and commodity producers, alongside greentech, clean air, andcarbonreductionstrategies,isadiversified,realisticwaytoinvestinthemajorglobaltrendtowardnet-zerocarbonemissions.
Take advantage of tech volatility
Despite headwinds from rising yields, we believe the overall earnings outlook for the tech sec-tor remains robust. In particular, we see upside for companies exposed to three foundational technologies:artificialintelligence,bigdata,andcybersecurity,orthe“ABCsoftech.”
Source: UBS, as of February 2022
Charts and scenarios are for illustrative purposes only. Historical performance and forecasts are no guarantee for future performance.Please see important disclaimer at the end of the document.
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UBS Investor Forum InsightsAt this month’s Investor Forum, participants discussed the outlook for inflationandinterestrates,andhowtofindreturnsinvolatilemarkets:
– Mostparticipantsagreedthatinflationislikelytoremain“sticky”givensupply bottlenecks and structural trends such as the energy transition. Commoditieswereseenasagoodsourceofinflationprotectioninport-folios, as well as a valuable hedge against escalating geopolitical ten-sions.
– Global growth is expected to decelerate, but to remain positive even with the impending rise in US interest rates. Participants considered bondsasalesseffectiveportfoliodiversifier,althoughsomesawoppor-tunities in select areas like high yield bonds.
– Withcurrentmarketconditionspressuringequityvaluations,somepar-ticipants favored a more neutral stance on the asset class, although oth-ers urged patience and expected returns to recover. In the meantime, participants saw opportunities in value stocks, emerging market bonds, Chinese equities, and commodities.
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11February 2022 – UBS House View Monthly Letter
UBSChiefInvestmentOffice’s(“CIO”)investmentviewsarepreparedandpublishedbytheGlobalWealthManagementbusinessofUBSSwitzerlandAG(regulatedbyFINMAinSwitzerland)oritsaffiliates(“UBS”).The investment views have been prepared in accordance with legal requirements designed to promote the independence of investment research.
Generic investment research – Risk information:This publication is for your information onlyand isnot intendedasanoffer,orasolicitationofanoffer,tobuyorsellanyinvestmentorotherspecificproduct.Theanalysiscontainedhereindoesnotconstituteapersonalrecommendationortakeintoaccounttheparticularinvestmentobjectives,investmentstrategies,financialsituationandneedsofanyspecificrecipient.Itisbasedonnumerousassumptions.Differentassumptions could result inmateriallydifferent results.Certain servicesandproducts aresubjecttolegalrestrictionsandcannotbeofferedworldwideonanunrestrictedbasisand/ormaynotbeeligibleforsaletoallinvestors. All information and opinions expressed in this document were obtained from sources believed to be reliable and in good faith,butnorepresentationorwarranty,expressor implied, ismadeastoitsaccuracyorcompleteness(otherthandisclosuresrelating to UBS). All information and opinions as well as any forecasts, estimates and market prices indicated are current as of the date of this report, and are subject to changewithout notice.Opinions expressed hereinmay differ or be contrary to thoseexpressedbyotherbusinessareasordivisionsofUBSasaresultofusingdifferentassumptionsand/orcriteria.
Innocircumstancesmaythisdocumentoranyoftheinformation(includinganyforecast,value,indexorothercalculatedamount(“Values”))beusedforanyofthefollowingpurposes(i)valuationoraccountingpurposes;(ii)todeterminetheamountsdueorpayable,thepriceorthevalueofanyfinancialinstrumentorfinancialcontract;or(iii)tomeasuretheperformanceofanyfinancialinstrumentincluding,withoutlimitation,forthepurposeoftrackingthereturnorperformanceofanyValueorofdefiningtheassetallocation of portfolio or of computing performance fees. By receiving this document and the information you will be deemed to represent and warrant to UBS that you will not use this document or otherwise rely on any of the information for any of the above purposes. UBS and any of its directors or employees may be entitled at any time to hold long or short positions in investment instruments referred to herein, carry out transactions involving relevant investment instruments in the capacity of principal or agent, orprovideanyotherservicesorhaveofficers,whoserveasdirectors,eitherto/fortheissuer,theinvestmentinstrumentitselforto/foranycompanycommerciallyorfinanciallyaffiliatedtosuchissuers.Atanytime,investmentdecisions(includingwhethertobuy,sellorholdsecurities)madebyUBSanditsemployeesmaydifferfromorbecontrarytotheopinionsexpressedinUBSresearchpublications. Some investments may not be readily realizable since the market in the securities is illiquid and therefore valuing the investmentandidentifyingtherisktowhichyouareexposedmaybedifficulttoquantify.UBSreliesoninformationbarrierstocontroltheflowofinformationcontainedinoneormoreareaswithinUBS,intootherareas,units,divisionsoraffiliatesofUBS.Futures and options trading is not suitable for every investor as there is a substantial risk of loss, and losses in excess of an initial investment may occur. Past performance of an investment is no guarantee for its future performance. Additional information will bemadeavailableuponrequest.Someinvestmentsmaybesubjecttosuddenandlargefallsinvalueandonrealizationyoumayreceivebacklessthanyouinvestedormayberequiredtopaymore.Changesinforeignexchangeratesmayhaveanadverseeffectontheprice,valueor incomeofan investment.Theanalyst(s) responsibleforthepreparationofthis reportmay interactwithtrading desk personnel, sales personnel and other constituencies for the purpose of gathering, synthesizing and interpreting market information.
Taxtreatmentdependsontheindividualcircumstancesandmaybesubjecttochangeinthefuture.UBSdoesnotprovidelegalortax advice and makes no representations as to the tax treatment of assets or the investment returns thereon both in general or with referencetospecificclient’scircumstancesandneeds.Weareofnecessityunabletotakeintoaccounttheparticularinvestmentobjectives,financialsituationandneedsofourindividualclientsandwewouldrecommendthatyoutakefinancialand/ortaxadviceastotheimplications(includingtax)ofinvestinginanyoftheproductsmentionedherein.
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Options and futures are not suitable for all investors, and trading in these instruments is considered risky and may be appropriate only for sophisticated investors. Prior to buying or selling an option, and for the complete risks relating to options, you must receive a copy of “Characteristics and Risks of Standardized Options”. You may read the document at https://www.theocc.com/about/publications/character-risks.jsporaskyourfinancialadvisorforacopy.
Investing in structured investments involves significant risks. For a detaileddiscussionof the risks involved in investing in anyparticularstructured investment,youmustreadtherelevantofferingmaterials for that investment.Structured investmentsareunsecured obligations of a particular issuer with returns linked to the performance of an underlying asset. Depending on the terms of the investment, investors could lose all or a substantial portion of their investment based on the performance of the underlying asset. Investors could also lose their entire investment if the issuer becomes insolvent. UBS Financial Services Inc. does not guarantee
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inanywaytheobligationsorthefinancialconditionofanyissuerortheaccuracyofanyfinancialinformationprovidedbyanyissuer. Structured investments are not traditional investments and investing in a structured investment is not equivalent to investing directly in the underlying asset. Structured investments may have limited or no liquidity, and investors should be prepared to hold their investment to maturity. The return of structured investments may be limited by a maximum gain, participation rate or other feature. Structured investments may include call features and, if a structured investment is called early, investors would not earn any further return and may not be able to reinvest in similar investments with similar terms. Structured investments include costs and fees which are generally embedded in the price of the investment. The tax treatment of a structured investment may be complexandmaydifferfromadirect investment intheunderlyingasset.UBSFinancialServices Inc.and itsemployeesdonotprovide tax advice. Investors should consult their own tax advisor about their own tax situation before investing in any securities.
Important Information About Sustainable Investing Strategies: Sustainable investing strategies aim to consider and incorporate environmental, social andgovernance (ESG) factors into investmentprocess andportfolio construction. StrategiesacrossgeographiesandstylesapproachESGanalysisandincorporatethefindingsinavarietyofways.IncorporatingESGfactorsor Sustainable Investing considerations may inhibit the portfolio manager’s ability to participate in certain investment opportunities that otherwisewould be consistentwith its investment objective and other principal investment strategies. The returns on aportfolio consisting primarily of sustainable investments may be lower or higher than portfolios where ESG factors, exclusions, or other sustainability issues are not considered by the portfolio manager, and the investment opportunities available to such portfolios maydiffer.CompaniesmaynotnecessarilymeethighperformancestandardsonallaspectsofESGorsustainableinvestingissues;there is also no guarantee that any company will meet expectations in connection with corporate responsibility, sustainability, and/or impact performance.
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USA: Distributed to US persons by UBS Financial Services Inc., UBS Securities LLC or UBS Swiss Financial Advisers AG, subsidiaries ofUBSAG.UBSSwitzerlandAG,UBSEuropeSE,UBSBank,S.A.,UBSBrasilAdministradoradeValoresMobiliariosLtda,UBS AsesoresMexico, S.A. deC.V.,UBS SuMi TRUSTWealthManagementCo., Ltd.,UBSWealthManagement Israel Ltd andUBSMenkulDegerlerASareaffiliatesofUBSAG.UBSFinancialServicesIncorporatedofPuertoRicoisasubsidiaryofUBSFinancialServicesInc.UBS Financial Services Inc. accepts responsibility for the content of a report prepared by a non-US affiliate when it distributes reports to US persons. All transactions by a US person in the securities mentioned in this report should be effected through a US-registered broker dealer affiliated with UBS, and not through a non-US affiliate. The contents of this report have not been and will not be approved by any securities or investment authority in the United States or elsewhere. UBS Financial Services Inc. is not acting as a municipal advisor to any municipal entity or obligated person within the meaning of Section 15B of the Securities Exchange Act (the “Municipal Advisor Rule”) and the opinions or views contained herein are not intended to be, and do not constitute, advice within the meaning of the Municipal Advisor Rule.
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