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CIO Americas, WM
25 June 2018
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UBS House View Weekly - 25 June 2018
Deeper Dive
US-biased global
growth: EM pain as
dollar gains Mark
Haefele
Global economic growth dynamics appear to have shifted. Even though over time the growth divergence should narrow,
Last year, for the first time since 2007, all 45 countries tracked the shift in favor of the US economy is helping support the
by the OECD grew. And in January at the World Economic US dollar, with the dollar index gaining 7% since a February
Forum in Davos, the International Monetary Fund trumpeted the low. USD strength may persist in the near term; so in our
"broadest synchronized global growth upsurge since 2010." But tactical asset allocation, we want to avoid being underweight
since then, synchronization has given way to more US-biased US dollars, and avoid large overweight positions in emerging
global growth. market (EM) assets, which tend to be negatively impacted by
a rising dollar. Against this backdrop, we recently made three
After 2.2% annualized growth in the first quarter, US GDP is changes to our positioning:
tracking at close to a 4% annualized rate in the second quarter. ► We closed our overweight in EM equities versus US
In contrast, Eurozone data has consistently disappointed, and government bonds. The greenback's rise has weighed on
after growth slowed to a 1.7% year-on-year rate in 1Q from the MSCI EM Index and pressured central banks in emerging
2.7% in 4Q 2018, ECB President Mario Draghi cautioned in markets to tighten monetary policy, presenting a headwind
June that the soft patch could last for longer. GDP expansion to the region’s economic growth. Although the growth
in China, after holding up in the first quarter, is showing signs outlook remains positive overall, first-quarter growth figures
of moderating, with growth in infrastructure investment, in were disappointing, notably in South Africa and Brazil,
particular, slowing as the government focuses on deleveraging. and business sentiment, as measured by the purchasing
managers’ index, is falling.
Looking ahead, US growth should be around 3% over our six-
month investment horizon. The stimulus from fiscal policy is still ► We have halved our overweight in USD-denominated
getting stronger and should peak around the end of the year. EM sovereign bonds. The asset class offers an attractive
Eurozone growth should improve moderately by the second yield of 6.5%, or 3.5 percentage points over equivalent
half of the year as one-off factors unwind. These include strikes, duration US Treasuries; but weaker relative economic
an unusually high number of bridge holidays in the first half, a momentum and heightened political risk in Mexico, Turkey,
larger-than-usual flu epidemic, and the formation of the new and Brazil present a risk, as do trade tensions between the
German government that held back government consumption. US, Mexico, and China.
Our base case for China is that some slowing of growth is
► We have closed our FX strategy overweight in the
inevitable, but will be controlled. We expect cuts to the reserve
Canadian dollar (CAD) versus the USD. The Bank of
requirement ratio (RRR) if necessary, and the government has
Canada has been slower than we expected to signal tighter
the scope for fiscal stimulus if the economy decelerates more
monetary policy and the CAD is also likely to be held back in
abruptly than expected. Overall, we forecast 6.6% growth this
the near term by uncertainty over the outlook for NAFTA.
year¨.
Bottom line
Synchronized global growth appears to have given way to a more US-biased global expansion. For the rest of the year, the divergence
should moderate as the Eurozone recovers and China’s slowdown is controlled. But the shift in favor of the US economy is helping
support the dollar. As a result, we reduce our FX strategy underweight to the US dollar and our tactical overweight to emerging
market (EM) assets, which tend to be negatively impacted by a rising dollar.
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UBS House View Weekly - 25 June 2018
Tradecraft
With the recent back-and-forth between the US
and China, the trade dispute has moved beyond
the media's glare and caught the attention of
even the most sober-minded market participants.
Michael Ryan International stocks fell 3.5% in the past two
CFA, Chief Investment Officer Americas weeks as the two countries have moved closer to
a series of escalating tariffs and trade restrictions.
The immediate impact of these trade regard to trade, it's helpful to look at seat to integrating emerging markets
disputes is limited, in our view, and how those interests have evolved over into a truly global economy.
therefore won’t imperil either the global the past 70 years and then ask how this
expansion or long-running bull market. evolution could impact future policy. Post-financial crisis: But the global
We estimate that the announced tariffs financial crisis shook the financial
on China would reduce growth by about Post-World War II: At the end of WWII, system to its core and prompted
0.2% and increase inflation by less than the US finally stepped decisively onto the many to question the primacy of free
0.1%. The effect on corporate profits world stage, seeking military alliances market capitalism. The emergence
could be more significant, especially and economic integration in order to of both China and the Eurozone as
for those companies facing potential confront an emerging threat – the global global economic powerhouses – and
disruptions to their supply chain, but communist movement. Global trade was potential trade adversaries to the United
would only modestly dampen the strong one way to prevent vulnerable nations States – resulted in yet another policy
profit environment. from falling into the Soviet sphere of inflection point. With the Soviet Union
influence, and the US often entered vanquished and the global economy fully
The bigger risks of course come over into trade relationships where the terms integrated, it’s not surprising to see the
the longer term. A deepening trade were not always in America's favor in US reassessing its strategic interests.
dispute could undermine consumer, order to serve a strategic goal: to tie the
business, and investor confidence. economic fortunes of the West together. The focus now is upon protecting
Capital spending could suffer as the intellectual property of US-based
companies become less confident in the Post-Berlin Wall: The fall of the Berlin companies, insuring a level playing field
commitment to globalization. Likewise, Wall marked a key pivot point in world for business practices, and addressing
US-based companies could encounter a history and left the US as the world’s perceived inequities in bilateral trade
more challenging operating environment only superpower. The US found itself relationships. It could be that that this
within China amid more restrictive with a unique opportunity to expand agenda is largely being driven by the
licensing requirements. its influence by extending the reach of current Administration as some believe,
free market practices and democratic and the policy pivot may only therefore
This suggests that while a full-blown values. The US foresaw global trade last as long as President Trump’s tenure.
trade war remains unlikely, the longer- playing a key role in the opening up of But if this is indeed how the US now
term implications of such a conflict – new markets in Eastern Europe, Latin defines its strategic interests, then these
on both the real economy and financial America, Africa, and Asia. This time sorts of trade disputes will only become
markets – would be significant. We around, it was less about tying Western more common in the future and markets
therefore need to better understand the interests together, and more about will need to learn to adjust.
dynamics behind the current dispute and promoting those common values in
where they may lead us long term. To order to expand growth globally. Bilateral Tradecraft may well replace statecraft
provide some context for what I believe terms of trade once again took a back as the biggest source of geopolitical
are America's strategic interests with uncertainty.
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UBS House View Weekly - 25 June 2018
US Gov't –3.5 0.15 1.06 –1.40 –1.58 1.46 2.97 BarCap US Agg Government
US Municipal 0.0 0.11 0.76 –0.38 0.87 3.58 4.30 BarCap Municipal Bond
US IG Corp 0.0 –0.31 0.35 –3.32 –1.49 3.36 5.14 BarCap US Agg Credit
US HY Corp 0.0 –0.04 0.82 0.69 3.50 5.60 7.84 BarCap US Agg Corp HY
Int'l Developed Markets 0.0 0.20 –0.12 –1.33 2.95 0.67 1.85 BarCap Global Agg xUS
Emerging Markets Local Currency 0.0 0.05 –2.16 –5.12 –0.13 0.90 N/A BarCap EM Gov
Emerging Markets Hard Currency +1.5 0.32 –0.05 –3.68 –1.07 4.52 6.47 BarCap Global EM (USD)
Equity +2.0
Global Equity +2.0 –1.05 –0.97 0.79 11.91 9.95 4.95 MSCI ACWI
US Large cap Growth –1.0 –1.07 3.11 9.13 23.16 16.96 10.88 Russell 1000 Growth
US Large cap Value +1.0 –0.56 –0.31 –0.68 8.39 10.82 7.37 Russell 1000 Value
US Mid cap 0.0 –0.62 1.73 4.00 14.35 13.00 9.23 Russell Mid Cap
US Small cap 0.0 0.11 3.83 10.38 21.54 13.35 9.63 Russell 2000
Int'l Developed Markets 0.0 –0.96 –3.36 –1.73 7.87 6.84 2.09 MSCI EAFE
EM Equity 0.0 –2.27 –4.45 –5.27 10.23 6.25 1.62 MSCI EMF
Commodities 0.0 –0.40 –4.32 –0.14 11.60 –6.84 N/A Blooomberg Commodity Index
MLPs 0.0 1.68 –1.00 0.75 3.03 –2.93 6.09 Alerian MLP Total Return
US Real Estate 0.0 2.49 6.74 0.30 2.02 9.03 6.24 FTSE NAREIT Equity REIT Index
*The tactical deviation is for a moderate, non-taxable investor without alternative investments. See the latest UBS House View: Investment Strategy Guide for an interpretation of the
tactical deviations and an explanation of the corresponding benchmark allocation.
**As of last month end
Source: UBS, as of 22 June 2018
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UBS House View Weekly - 25 June 2018
S&P 500 –0.87 1.29 4.00 15.38 13.90 9.12 SPX Index
Consumer Discretionary 0.0 –0.70 6.40 13.62 25.94 16.95 14.49 S5COND Index
Consumer Staples –1.0 0.16 4.83 –8.34 –4.67 8.33 8.72 S5CONS Index
Energy +1.0 1.52 –2.69 5.72 21.44 2.06 1.11 S5ENRS Index
Financials +1.0 –1.41 –4.00 –2.22 14.89 13.88 5.07 S5FINL Index
Health Care –1.0 –0.66 2.60 3.67 7.27 14.31 12.00 S5HLTH Index
Industrials 0.0 –3.37 –3.50 –3.41 7.17 13.09 8.62 S5INDU Index
Information Technology 0.0 –1.29 2.74 13.35 31.24 22.38 13.57 S5INFT Index
Materials +1.0 –2.07 –1.42 –2.36 11.04 10.72 5.06 S5MATR Index
Real Estate 0.0 2.55 5.40 –0.41 3.24 7.22 3.05 S5RLST Index
Telecom 0.0 –0.51 –0.37 –9.42 –1.08 3.96 4.61 S5TELS Index
Utilities –1.0 2.50 3.59 –1.95 –1.60 10.73 6.27 S5UTIL Index
Note: Tactical deviations are intended to be applicable to the US equity portion of a portfolio across investor risk profiles.
**As of last month end
Source: UBS, as of 22 June 2018
Market moves
Level 1–w chg YTD chg
S&P 500 2,755 –0.87% 4.00%
DJIA 24,581 –2.03% 0.54%
Nasdaq 7,693 –0.68% 12.02%
Nikkei 225 22,517 –1.47% –0.23%
Eurostoxx 50 3,442 –1.81% 0.88%
MSCI EM* 1,088 –2.26% –5.22%
MSCI World* 2,115 –0.88% 1.93%
MSCI EAFE* 1,980 –0.95% –1.38%
DXY 95 –0.28% 2.60%
Gold $ 1271/oz –0.66% –2.47%
Brent crude oil $ 75.6/bbl 2.87% 12.98%
US 10–year yield 2.89% –3 bps +49 bps
VIX 13.77 +1.8 pts +2.7 pts
Source: Bloomberg, as of 22 June 2018
Note: All returns are in local currency
* As of intraday 21 June 2018
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UBS House View Weekly - 25 June 2018
Earnings calendar
The Earnings Calendar provides publicly announced reporting dates and times of companies covered by Chief Investment Office GWM.
Reporting dates and times are subject to change by the reporting companies.
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UBS House View Weekly - 25 June 2018
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