Dear Investors,
UBS Asset Management – Strategic Viewpoint
Global equities
“The risk-reward proposition for global equities at an index level is not particularly attractive, but is becoming more positive.”
“Stocks remain expensive, but we believe earnings estimates will remain resilient as tight labor markets support consumer spending while profit margins remain relatively elevated.”
“Importantly, US stocks still account for nearly 60% of global equities, and are particularly richly valued.”
“Earnings estimates for S&P 500 companies are being revised higher once again, and the lower US dollar should help boost profits for multinational corporations.”
Ex-US developed market equities
“Non-US developed market equities are attractively valued but also highly cyclical.”
“There is a lot of variation between DM equity markets based on differing domestic policy stances and degrees of vulnerability to external headwinds.”
“Widespread improvements in shareholder return programs have increased the appeal of Japanese equities.”
“However, we have high conviction that the yen will appreciate, which somewhat diminishes the attractiveness of Japanese stocks in local currency terms.”
“Many forward-looking indicators for European equities continue to improve.”
“However, the ECB is committed to bringing policy rates well into restrictive territory, which should limit how much valuations can improve or how strongly Europe’s economy can rebound.”
Emerging markets
“While China’s reopening is primarily a story of recovering domestic consumption, we believe it will still produce positive, but measured, spillovers for its trading partners as well as mobility-sensitive commodities.”
“Broadly speaking, EM equities have both de-rated and have seen a larger total drawdown in earnings estimates than DM equities.”
“This limits the scope for relative underperformance versus global equities going forward, in our view.”
Moody’s Analytics – Troubles on the streets
“After 10 consecutive rate hikes and for the first time since January 2022, the committee did not lift the target range of the federal funds rate, instead keeping it at 5% to 5.25%.”
Trouble on main street
“Most small businesses in May reported declining sales volumes over the prior three months; the net percentage of small firms reporting higher sales volumes is firmly negative and trending toward recession territory.”
“This comes as uncomfortably high inflation over the past year has weighed on consumer confidence.”
“Also, higher borrowing costs and tighter lending standards by financial institutions have led to a slower expansion in consumer credit.”
“Growth has decelerated for revolving credit, which includes households’ credit cards and other forms of short-term debt.”
“Finally, negative wealth effects from falling house prices and the past selloff in stocks are headwinds to consumer demand, as spending from household wealth has historically been driven by changes in wealth rather the level of wealth itself.”
Declining sales and profit margins
“On their own, declining sales and profit margins on Main Street do not guarantee that the economy is in a recession or that a recession is dead ahead.”
“However, as the economy slows this year, the net percent of respondents citing poor sales as their single-most important problem could start to tick higher.”