- US can avoid a recession in 2020, helped by Fed easing, consumer spending, UBS CIO Mark Haefele says
- Downside risks increasing for the global economy and markets, Haefele says
As the trade war between the United States and China further escalated, UBS said it is underweighting equities in its portfolios in its global wealth management business to reduce its exposure to "political uncertainty".
The Swiss bank said it removed its overweight rating for global equities versus high-grade bonds, while also initiating an underweight rating for emerging market stocks versus high-grade bonds. The bank said emerging market firms are more exposed to "heightened market volatility, a slowing global economy, and heightened trade tensions."
"We still believe the US can avoid a recession in 2020, helped by additional Federal Reserve easing and strong consumer spending," Mark Haefele, UBS chief investment officer for global wealth management, said in a report dated Sunday. "We estimate the direct impact of all the additional tariffs will represent only a marginal drag on the US economy. But downside risks are increasing for both the global economy and markets."
The report came out on a weekend in which investors could not be blamed for feeling whiplash on the trade front, with US President Donald Trump sending out conflicting signals.
…unfair Trading Relationship. China should not have put new Tariffs on 75 BILLION DOLLARS of United States product (politically motivated!). Starting on October 1st, the 250 BILLION DOLLARS of goods and products from China, currently being taxed at 25%, will be taxed at 30%…
" Donald J. Trump (@realDonaldTrump) August 23, 2019
On Friday, China said it would add 10 per cent tariffs on US$75 billion worth of US products, prompting Trump to describe Chinese President Xi Jinping as an "enemy" on Twitter.
In a later series of tweets, Trump said he would increase existing tariffs on some US$250 billion of Chinese imports to 30 per cent and begin adding 15 per cent tariffs on another US$300 billion of goods on September 1.
Hong Kong stocks plunge as trade war flares up, protests heat back up
He also "ordered" American companies to look for an alternative to China or bring their manufacturing to the US, but there were doubts about his legal authority to carry out such a directive. White House officials insisted he had the authority under a 1977 law that has primarily been used to block the flow of money to terrorist organisations and countries facing US sanctions.
At the Group of 7 Summit in France on Sunday, Trump said, "I have second thoughts about everything" when asked by reporters if he had second thoughts about his aggressive stance on China. White House officials said Trump's comments had been misinterpreted by the press and he only regretted not raising tariffs higher.
Asian markets were off broadly in morning trading on Monday, with Hong Kong's Hang Seng Index declining 2.8 per cent and the Shanghai Composite Index off by about 1 per cent at the lunch break.
Christiaan Tuntono, senior economist for Asia-Pacific at Allianz Global Investors, said on Monday the chance of the US and China reaching a trade deal "has possibly declined further".
"Judging from the recent deterioration in the trade situation, it appears that China would rather bear the costs from a de facto cut-off from US trade and investments than catering to President Trump's demand," Tuntono said. "The Trump administration also seems prepared to cut China off from trade and direct investments through rising tariffs unless China capitulates."
In its report, UBS said it cautioned investors against taking "large equity underweights," as if they were preparing for the next recession or a global financial crisis.
"A broader policy response is likely if trade tensions worsen, including more aggressive easing from the Fed. For the time being, we expect the (Federal Reserve) to cut rates by 75 basis points over the next 12 months," Haefele said. "But while central banks may be able to limit the downside to markets, we believe their capacity to push equities higher is fading. "
UBS said "a more traditional economic cycle" " namely a global slowdown spreading from the manufacturing to the service sector, coupled with geopolitical risks " would have warranted a larger underweight position for equities.
"Today, however, inflation is tame and government bond yields are at historic lows. When pension funds and other asset allocators rebalance portfolios in the coming months, there are few alternatives to equities. Central banks are in easing mode and fiscal stimulus is also on the horizon," Haefele said. "Thus, even if the manufacturing slowdown spreads to the wider economy, we believe the downside risk to equities is closer to 15 per cent than 25 per cent."
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