UBS Global Wealth Management has cut its position on global equities following the worsening of the global trade conflict.
The firm opened its global equity overweight in January 2017 and added to it in January 2018, maintaining an overweight position on global equities throughout the recent conflict but tensions have now reached a tipping point. UBS’ new scenarios for global trade are less optimistic than before and now concede that a solution may only be achieved after several rounds of talks and new tariff measures.
UBS Global Wealth Management believes there is a 60 percent chance that trade tensions will escalate further. It expects trade tensions certainly to persist until after US midterm elections, and possibly for the entire duration of the Trump administration.
Markets are not sufficiently pricing in a fresh round of tit-for-tat tariffs, which have the potential to impact business investment and hiring, and as a result, UBS is recommending a broadly neutral risk exposure to offset the risks which come from rising protectionism.
As well as advocating a more cautious stance on equities, the firm is also reducing its cyclical exposure at a sector level. In the US, it is downgrading its position on both the industrial and utility sectors, and it is also downgrading its position on the consumer discretionary sector in the Eurozone.
Caroline Simmons, deputy head of UBS Wealth Management’s UK investment office, said: “While we expect the trade disputes to ultimately be resolved before the world is tipped into another recession, our base case now assumes things will get worse before they get better.
“The benign macroeconomic environment, and strong fundamentals, have emboldened a recent sense of market optimism. But there is a very real danger of overlooking the possibility of the trade situation getting worse, which could have significant impacts, such as supply-chain disruptions, reduced hiring, and lower investment.”
Ms Simmons adds: “We recommend strategies that still provide exposure to the strong earnings growth fundamentals but are likely to withstand volatility better than the overall market. Defensive stocks, which are more stable than cyclical stocks, should outperform.”
UBS Global Wealth Management oversees $2.4 trillion in assets.