LONDON (Reuters) - Global equity markets may have room for one last push higher in 2019, UBS Wealth Management’s chief investment officer predicts, but switching into value stocks and adding hedges will help to protect against bumps in the road.
Mark Haefele, who oversees more than $2 trillion in assets, told the Reuters Global Investment Outlook Summit he had returned to equities and risk assets recently after cutting exposure in July.
“European assets and EM assets trade at a discount to long-term PE valuations. The U.S. is around average valuations, but if you look at the equity risk premium and the alternative that bonds provide, the valuation isn’t too bad,” Haefele said.
“We think we could get another leg up in equities,” he predicted at the Reuters’ London office.
World equities .MIWD00000PUS suffered their worst month since May 2012 in October as a tech stock tumble, a more hawkish-than-expected U.S. Federal Reserve and escalating Sino-U.S. trade tensions roiled markets.
Haefele said he had cut exposure to tech stocks early in spring on valuations having run too far and rotated into
value stocks - financials and energy - in the second half.
“From here, all things being equal... we want to pair our overweight in equities with some hedges in portfolios,” Haefele said.
“We have puts on the S&P500 and an overweight in 10-year Treasuries, we have an overweight in yen versus the Taiwan dollar as an example of things that we have put in to stabilize.”
Haefele also said he used turmoil in Italian bond markets to stock up on two-year sovereign issues and planned to do so again.
Italian government bond yields have scaled multi-year peaks in recent months, as an anti-establishment government took office and then set out spending plans that put it on a collision course with Brussels.
“Look at the budget differential they are fighting about in Europe compared to the massive increase in budget deficit the US has taken on — is this really something you want to have such a big fight about? Nevertheless it is a reality,” said Haefele.
“We would take advantage if you see (the) spread blow out again.”
Asked about emerging markets, Haefele said it was too early to return to developing countries’ currencies and predicted more weakness for China’s yuan. “In six months we have it at 7.10 (to the dollar),” he said.
Haefele also said that:
** The biggest risk was the re-emergence of inflation, which could tie the Federal Reserve’s hands. “(This) would force more tightening and end the market cycle in the classic fashion where the Fed takes away the punch bowl.”
** Trade tensions between Washington and Beijing China probably won’t get significantly worse from here, but are also unlikely to be resolved quickly.
** He expected earnings growth in the U.S. would be closer to 4 percent in 2019 after estimating 27 percent this year.
** The capital controls China had put in place had really changed investors’ confidence, assuring markets that despite the issuance bonanza, Beijing could prevent a liquidity crisis in the short term.
** The European Central Bank could possibly deliver one rate hike toward the end of next year.
** Euro-dollar won’t hit parity. “We think that is a step too far. We have got a near-term 1.10 target and then moving toward a bounce back, but we probably have to get some kind of resolution on Italy.”
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Additional reporting by Sujata Rao; editing by John Stonestreet