Europe Economy

How to Position Yourself for 'Months of Continued Volatility'


The world economy sits on a “wobbly stool” but its three legs – Europe, the United States and China – remain solid, UBS Wealth Management said, reaffirming its view that investors should take on some risk, mostly in high-yield credit.

“We remain mindful that the longer the problems in Europe persist, the more strain it can put on the U.S. economy. In this environment, we choose to take most of our risk in credit,” the brokerage arm of UBS said in a note to clients.

“The next few months are likely to bring continued volatility, and it may get worse before it gets better.”

Mark Haefele, head of investment at UBS Wealth Management told CNBC’s "Squawk Box Europe": “We like high-yield credit, we like emerging market bonds and we like investment grade bonds.”

The high yield credit play has worked well so far, he said. “It’s positive on the year. And with this recent market volatility, the spreads have come out again, so there is an opportunity for investors to get back in.”

“Overall we’re neutral on equities. We have an overweight on U.S. equities because we think it’s one of the stronger economies out there…I would expect that equity markets have a relatively muted performance in this kind of environment,” he said.

“If you can stay through the volatility and if you have that longer term horizon, we think you’ll get paid because corporate profits remain strong in the United States, corporate balance sheets remain strong,” according to Haefele.

UBS Wealth Management is underweight in Europe. Haefele conceded that prices there had fallen significantly but while the brokerage believes there is no more than a 20 percent chance that Greece will exit the euro, he does not expect a resolution to the region’s problems over the summer.

“Germany is in the best shape in Europe, because we’ve seen this fall in the euro and that will help them. A 10 percent fall in the euro can be like a 1 percent boost to GDP [in the euro zone],” he said.

Positioning Yourself for 'Months of Continued Volatility'

For investors who are more concerned in the short term due to the upcoming Greek elections, UBS Wealth Management suggests a number of ways to “de-risk” and move into safer assets that still offer attractive returns.

Investors who do not want to sit through the volatility markets are likely to see in the next months could reduce exposure to stocks, it said.

“Most at risk in the case of a larger global growth slowdown, or further acceleration of the euro crises, would be euro zone and emerging market equities,” UBS Wealth Management said in a note.

“Within emerging markets, we expect Asian assets to be better shielded from a further sell-off, while Central and Eastern European countries, as well as commodity exporting and strongly export-dependent countries, would likely suffer more,” it added.