The asset management arm of the banking group sees opportunities for investing in specific markets and sectors but, for the equity market as a whole, it has cut back from an overweight position.

UBS Asset Management is cutting its exposure to global equities to a neutral stance, concerned about moderating economic growth and US-China trade tensions, although it says there remain specific opportunities for stock market investors.

The asset management arm of the Swiss bank announced its shift in its mid-year market outlook report.

"The headline story of early 2019 for investors has been the dramatic upswing in global financial markets, especially in contrast to the drawdown and volatility spikes we saw in late 2018. The US Federal Reserve’s move away from rate hikes along with improving economic conditions in China, are the primary drivers behind this turnaround. But, as always, the investment landscape is complex and a number of risks still lurk on the horizon. The US economic expansion becomes the longest in history this month, which brings to mind the old saying, ‘nothing good lasts forever’,” Suni Harford, head of investments, UBS AM, said.
 
On the positive side, UBS reckons that China's economic stabilisation will increase investment in that country. It said that most investors are underweight China relative to its share of global markets and there is an increasingly strong case for asset allocators to consider a standalone allocation to China.

Diversifying into real assets and related alternatives is likely to continue, the firm said, although careful asset selection is vital.

 The key is thoughtful asset selection, intensive asset management and selling to the best buyer at a very opportune time.

UBS said that it expects emerging markets to deliver two-thirds of global economic growth over the next five years, citing The World Bank’s own forecasts. In addition, the majority of the world’s growth in working-age population in the next 10 years will be centred, making emerging markets an “essential part of an investor’s portfolio”, it said.

Asset allocation
"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. We believe that this environment favours a neutral approach to risk assets with hedges against geopolitical risks" Evan Brown, head of macro asset allocation strategy, UBS Asset Management, said. "Ongoing US-China trade uncertainties create risks for business confidence, but ultimately we expect some de-escalation given strong incentives on both sides to avoid unacceptable economic and market weakness.”

UBS said that the importance of China to the global economy was demonstrated when Bloomberg put China bonds into its indices in April 2019. It showed that Chinese bonds went directly into a developed market benchmark. Additionally, China will soon become the largest component for any emerging market bond or equity index, the firm continued.

"For equity investors, China's stock markets will likely continue their growth path in 2019 and become some of the largest in the world. If, as we expect, onshore China markets are fully included into the MSCI EM benchmark, China equities will account for an estimated 40 per cent of that index alone" Bin Shi, head of China equities, UBS Asset Management, said.

"An active, standalone allocation gives investors a better chance of capturing growth opportunities in China. As China transitions to a services and consumer-led economy, many new drivers and innovative companies in the consumer, IT, healthcare sectors are emerging and outpacing the traditional investment-led sectors,” Bin Shi added.