Macro Matters: US and China policies has driven macro turnaround in H1, says UBS

The first half of 2019 has been a turnaround story, according to UBS Asset Management, as the US and China, the world’s two largest economies, has implemented growth-supporting policies that helped reverse the late 2018 global market downturn.

UBS says that the Fed’s January pivot from a tightening to a neutral bias “was a powerful lift to risk assets, bringing down discount rates and increasing the probability of a longer economic cycle”.

At the same time, China’s easing of monetary, fiscal and regulatory policy is helping to cushion its economy. UBS added that it expects eventual de-escalation of the ongoing trade uncertainties given strong incentives on both sides to avoid unacceptable economic and market weakness.

UBS’ Evan Brown, Head of Macro Asset Allocation Strategy, and Ryan Primmer, Head of Investment Solutions, wrote:

“With valuations for risk assets having rebounded, we have turned neutral from overweight global equities, given moderating economic growth and associated risks from the trade and technological conflict between the US and China. In our base case, tensions are dialled down given strong incentives on both sides to avoid major disruption. If we are right, we are likely enduring another mid-cycle slowdown in this record long economic cycle. We believe that this environment favours a neutral approach to risk assets with hedges against geopolitical risks.

“The global economy is enduring its third mid-cycle slowdown of the post-crisis expansion. We are closely watching Purchasing Manager Indexes (PMIs), which remain above the 50-line separating expansion from contraction but are now signalling somewhat below trend growth. Our base case for coming months is that the global PMI will stabilise above 50, implying a soft landing for the global economy. Our assessment is based on the view that while there has been pronounced weakness in the manufacturing and goods sectors, global services sectors have generally remained resilient.

“This underlying durability is linked to ongoing strength in developed economy household income growth and is supporting consumption, by far the largest driver of growth in developed countries. The dovish turn by central banks has led to a broad easing of financial conditions, providing a cushion for consumers and businesses.”

Investors have been diversifying their portfolios into real assets and related alternatives for the last two decades and UBS expects this to continue.

Suni Harford Head of Investments at UBS Asset Management explained:

“The evolving global macro forces impacting regional economies and currencies underscores the need for a local market focus vs. a regional or global focus for real asset investments. We believe the key to real estate is thoughtful asset selection, intensive asset management and selling to the best buyer at a very opportune time.

“With many moving parts in the macro environment, flexibility and diversification are key, along with the ability to respond quickly when opportunities present themselves. We therefore continue to advocate a bias to high conviction, focused investment styles.”

james.wallace@realassetmedia.com