GENEVA--()--Faced with a sluggish and stimulus-dependent world economy, central banks have reasserted their will to do all in their power to restore growth and confidence in the markets.
“central banks have understood that they must ‘keep on pushing’ to fend off the risk of deflation and put the economy back on track”
In the eurozone, the central bank’s credit stimulus has yet to feed through into the real economy, which does not bode well for consumer spending or investments, the only two factors that can set the economy on a self-sustaining growth path. And whilst the effects of the Fed’s measures have recently started to be felt in the US, thereby boosting its real estate sector, the world’s leading economy is still on the edge of its so-called fiscal cliff – the combination of drastic spending reductions to alleviate public debt and the expiry of Bush-era tax cuts could cost the US economy up to 5% of its GDP.
According to Alan Mudie, Union Bancaire Privée’s Chief Investment Officer, “central banks have understood that they must ‘keep on pushing’ to fend off the risk of deflation and put the economy back on track”. In short, the challenge in 2013 will be to sustain the current reflation policies while keeping inflation at bay.
UBP’s convictions for 2013
- Equities should continue to be favoured, whilst maintaining the Bank’s all-important focus on high-quality stocks, i.e. those of large firms with an international reach, high entry barriers and regular cash flows allowing high and rising dividend payments.
- Another focus is real assets, which are more resilient to – and provide more protection from – inflation. More specifically, plays like mining companies and large energy producers are the most likely to benefit from the current monetary policies. The US real estate sector is also well-positioned to take advantage of the current situation and participate in the economic recovery.
- Eventually, the creeping monetisation of public debt and central bank intervention are by their very nature likely to erode the value of the currency in countries that make the most assiduous use of the printing press; gold is undeniably set to gain from this trend and its price will rise with monetary expansion.
- One should also steer clear of government bonds and within credit convertible bonds are a good choice: through their convexity they allow the investor to capture equity rises while limiting downside risk, with lower volatility than in pure equities.
- Emerging countries still offer stronger fundamentals and their external debt remains attractive for investors.
- Lastly, flexible alternative strategies, which are able to benefit from the reflation-driven equity surge and also to shelter from passing corrections, should be targeted. The environment is also propitious for strategies that focus on distressed debt and on opportunities generated by financial institutions’ deleveraging.
Note to editors
UBP is a leading private bank in Switzerland and is one of the country’s best-capitalised banks, with a Tier 1 ratio of 23.5%. The Bank specialises in wealth management for both private and institutional clients. It is based in Geneva and employs around 1,400 staff in some twenty locations worldwide. The Bank had CHF 76 billion (USD 80 billion) in assets under management as at 30 June 2012.