With a favourable trend in traditional tech exports and a declining US dollar, Tan Min Lan, Head of the Asia Pacific Investment Office at UBS Global Wealth Management, advises regional investors to uphold a well-balanced portfolio of equities, bonds and alternatives. This strategy is deemed the most effective for wealth preservation and growth.
UBS continues to see an upside for balanced portfolios in both its base case and upside scenarios. “In our capital market assumptions over the next five years, we believe a balanced portfolio of 45% stocks, 35% bonds and 20% alternatives will outperform cash by 5% annually. In other words, you can hold this portfolio over a 20- to 30-year time frame and it would deliver 3 to 4 times the cash returns over the period.”
Tan notes at the CIO outlook conference that UBS’s base case is for a “soft landing”, where economic growth slows to just below trend. Inflation is expected to fall towards the US Federal Reserve’s (Fed) targets by 2H2024 and US interest rates will be cut four times throughout the year.
In UBS’s Year Ahead 2024 report released on Nov 16 last year, the firm wrote that it expects slower growth for the US economy in 2024 as consumers face mounting headwinds. Additionally, the firm forecasted European growth would remain subdued while China would enter a “new normal” of lower but potentially higher-quality growth.
Focus on quality
Since the report’s release, Tan emphasises that growth data has exhibited overall resilience. US retail sales surpassed expectations with a 4.1% year-on-year increase in November. The labour market has also demonstrated strength, adding 216,000 jobs in December, maintaining an unemployment rate of 3.7%.
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Data from China have slightly exceeded expectations, showing positive surprises in retail sales and industrial production. She anticipates the market to maintain full-year growth in the mid-4% range with sustained policy support. In broader Asia, there is anticipation of gaining from an upswing in traditional tech exports. As the US dollar weakens, emerging market equities might see continued improvement in 2024.
Tan advises investors to prioritise quality and maintain a balanced portfolio. Quality bonds, offering decent yields and capital appreciation potential, remain favourable amid slower growth. Declining bond yields are expected to support sectors like US tech, with improved earnings driven by heightened demand in traditional tech segments.
Investors can enhance their primary quality equity holdings by tactically including exposure to US small caps, especially as the Fed’s policy shift approaches. With approximately 50% of small-cap floating rate debt, this segment is highly responsive to interest rates, making it a notable beneficiary of potential swift Fed rate cuts. “At the same time, they are trading at a large P/E discount to the S&P 500 at about 30% now,” adds Tan.
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Managing liquidity should also be at the top of investors’ minds. While rising central bank policy rates have increased the appeal of cash deposits for many investors, Tan says such high rates are unlikely to prevail through the year. “Falling interest rates do not only reduce the return of cash, they also increase reinvestment risk. Investors could be left on the sidelines if bonds and equities rally sharply.”
Following UBS’s Year Ahead 2024 report, stocks and bonds surged while inflation slowed. The Fed’s increased openness to policy easing prompted the UBS investment office to adjust its expectations for the year and revise its investment approach.
The investment bank sees quality fixed income as an attractive risk-return option. In a soft landing scenario, they expect mid-single digit returns for high-quality, medium-duration fixed income. In a “hard landing,” they anticipate double-digit returns. The report emphasises that even in a “Goldilocks” scenario, which is the least favourable, returns for quality fixed income are likely to be positive.
It is also optimistic about yield curve “steepening” trades, which involve buying short or medium-duration bonds and selling longer-duration bonds. The firm anticipates that these trades will perform well not only in its base scenario but also in an aggressive rate-cutting cycle or when the term premium increases significantly due to short-term supply challenges.
Since UBS issued its report on equities, the S&P 500, Nasdaq, Russell 2000 US small-cap index and Europe’s Stoxx 600 have all experienced gains of 4%, 2.8%, 10.4% and 5.9%, respectively. Keeping this in mind, UBS recommends quality companies anticipated to achieve significant outperformance, even in a hard-landing scenario.
UBS maintains its preference for the US IT sector in line with its focus on quality. Among the 11 US equity sectors, tech boasts the highest return on invested capital, approximately 20% over the last 12 months and robust balance sheets. With business models integrating subscription-based revenue streams and involvement in high-growth areas like AI, UBS believes that tech companies are well-positioned for substantial earnings growth this year.
In currencies, UBS recommends keeping long positions in the US dollar unhedged in the short term, except for the Australian dollar. They also suggest keeping long positions in the Euro versus the Swiss franc unhedged.
Finally, UBS has lowered its oil price forecasts and expects Brent crude to fluctuate between US$80 ($107) and US$90 per barrel in 2024. Investors willing to take on risk should consider selling Brent’s downside price risks or increasing exposure to longer-dated Brent oil contracts.
The gold price forecast for the end of 2024 has been adjusted to US$2,250 per ounce from US$2,150. UBS suggests investors consider adding new long positions if gold prices drop below US$2,000 per ounce.
