In this environment of extreme market volatility and periods that swing between “euphoria and panic” it is tempting to follow the news headlines from risk on to risk off and back, UBS CIO Alex Friedman said, but this investment approach will not make you money in the long term.
Friedman recommends staying neutral in equities, despite the heightened market volatility.
He points out that with “central banks remaining broadly supportive, financial markets already discounting weak global growth, profit margins to remain high and global growth unlikely to collapse”, a neutral stance is more appropriate than being underweight equities.
UBS says its biggest overweight position remains in US assets, of which US high yield credit is believed to offer the most attractive risk-reward profile, where Friedman expects total returns of about 8 percent over the next six months.
"US companies are sitting on record high cash balances, while refinancing pressures have been alleviated by generally low leverage, long term debt and robust primary bond markets," he says.
In terms of currencies, UBS continues to like the US dollar and believes that due to relatively stronger growth and the greenback’s safe haven appeal, the US dollar should remain supported. However, Friedman points out that stimulus from the Federal Reserve and “concerns over the fiscal cliffmay limit upside potential into the latter half of 2012."
According to Friedman, financial markets are currently largely driven by the “titanic battle in the developed world between slow growth, deleveraging, and the money printing action of central banks".
He quotes a famous ice-hockey player as saying:” I skate to where the puck is going to be, not where it has been”, but says it is impossible for even the best players to know where the puck is going. “So the key is to get the general direction right.”