The world’s largest wealth manager turned bearish on stocks this week on fears that the latest escalation in the trade war between the U.S. and China poses a bigger threat to global markets.
UBS Wealth Management, which oversees more than $2.48 trillion in invested assets, has gone “underweight” on equities for the first time since the eurozone crisis in 2012.
According to a note from UBS Wealth Management’s Global Chief Investment Officer Mark Haefele, the asset manager has cut its positioning relative to high-grade bonds to reduce its exposure to the ongoing trade war, political uncertainty, and slowing global growth.
“Risks to the global economy and markets have increased, following a renewed escalation in U.S.-China trade tensions,” wrote Haefele, who has resisted turning bearish on stocks since the world’s two largest economies entered into the trade fight last year.
But U.S. President Donald Trump’s decision last Friday to increase tariffs on $250 billion of Chinese goods to 30% from 25% and raise a levy on an additional $300 billion worth of Chinese goods—including toys, clothing, shoes, and electronics—to 15% from 10% prompted Haefele to issue the downgrade, saying in the note that customers should cut exposures in their portfolios that span various assets classes.
Last Friday, Trump ratcheted up tensions ahead of the G7 gathering in taking to Twitter to command U.S. companies to “immediately start looking for an alternative to China.” The tweet triggered a sell-off that wiped -2.6% from the U.S. equity market as investors fled from stocks and into safer assets like government bonds.
“It seems less and less likely that [the trade war] will de-escalate before the end of the year,” Haefele said to the Financial Times on Monday. “This latest round of tariffs increases the risk that global growth and manufacturing growth will slow.”
Haefele cautioned “against large equity underweights” and reiterated his view that the U.S. will avoid a recession in 2020.
But other strategists say that the ongoing trade war is making it more difficult to be bullish on stocks.
“Sentiment is so fragile right now,” Candice Bangsund, portfolio manager at Fiera Capital, said. “The market is trading off… every headline and that is driving the risk-off behavior.”
Nomura’s Masanari Takada agrees and noted that sentiment is nearing its lowest levels of this market cycle, saying “the correlation between sentiment then and now remains quite high,” referring to the market crash in 2008. “Even the passing risk-on phase after the initial shock of the yield curve inversion [this month]… and the risk-off mood that struck on 23 August nearly track the pattern recorded in 2008.”
UBS’ shift into bearishness factors in a new underweight position in emerging market stocks, which Haefele wrote “are more exposed to heightened market volatility, a slowing global economy, and heightened trade tensions.” Earlier this month, UBS more than halved its 2019 earnings forecast for Asia to 2.8% from 6.3%, saying that Taiwan and Korea will likely bear the brunt of the slowdown considering their reliance on trade and technology.
Paul Sandhu, head of multi-asset quant solutions and client advisory at BNP Paribas Asset Management, said that he expects fund flows to return to Asia if the U.S.-China trade deal “comes together.” He says investors can take advantage of a potentially weaker U.S. dollar, and that falling flows to the region will soon reach an “inflection point such that asset allocation decisions are going to have to be made in favor of those markets.”
Asian stock markets were a sea of red earlier this week after the latest trade escalations, with the MSCI Asia Pacific index down as much as -1.8%. Nomura cut its rating on the MSCI Hong Kong Index from overweight to underweight citing concerns about the impact of a weaker yuan on H.K. dollar-priced stocks.
“With talks between the U.S. and China dominating market moves over the near term, investors should brace for higher volatility,” Haefele said. “We believe it is prudent to take action to neutralize part of this event risk.”