UBS’s wealth management division is continuing to hold its
exposure to risk assets, taking the view that the current budget row between
the White House and Congress in the US is taking place against a
stronger economic backdrop than earlier fiscal conflicts.

In a note, Michael Ryan, head of wealth management research Americas for UBS Wealth Management, says: “We
retain our pro-risk stance with overweights to US
equity, with our preferences for mid-cap stocks and cyclical sectors, as well
as our continued focus on US
high-yield credit.”

The failure of US president Barack Obama and his
Republican opponents in the House of Representatives to agree a budget deal,
raising the threat of a breach in the country’s “debt ceiling” and triggering a
default, has been cited in some quarters as a potentially heavy blow to the
world economy.

So far, however, UBS says, investors have been mostly
unaffected by the shutdown to the US Federal government; the S&P 500 Index
of shares is down only slightly since last week and US Treasury bond yields are
largely unchanged.

“But as the government shutdown continues and we also
approach that point when Treasury has exhausted all means of forestalling a
breach of the debt ceiling, the stakes will rise. Our view remains [that] despite
the lack of a clear pathway to reaching a compromise, it remains our view that
neither a government shutdown nor a debt ceiling showdown will undermine the
economic expansion or threaten market stability,” UBS said.

“While the last debt ceiling showdown appears to have had a
significant impact upon financial markets, it’s important to note that this
also occurred against a backdrop of a fragile domestic economy and a full blown
sovereign debt crisis in the eurozone. With the US economy now on firmer footing
and the eurozone having moved beyond the acute phase of the crisis, the
prospects for a replay this time around are more limited,” UBS continued.

The Swiss bank said “investors should look beyond the
current DC-inspired drama and focus once more upon gradually improving US
growth prospects, a still supportive monetary policy backdrop and fair levels
of market valuation when making investment decisions.”

UBS concluded that it is retaining its overweight stances on
US equities and high-yield debt.