UBS Shares 5 Investment Strategies To Profit From Return Of Inflation-Linked Trading – And Says Fears Over Fed Political Crash Are Overblown

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The market has worried about inflation, but UBS believes these concerns are overdone.
  • Reflation trade still has room and the Fed will not be raising rates anytime soon.
  • That’s according to Mark Haefele of UBS Global Wealth Management, who sees the 10-year rise to 2% this year.
  • The investment director offers five strategies to take advantage of the economic recovery underway.
  • See more stories on the Insider business page.

At the FOMC meeting in June, members of the Federal Reserve revealed interest rate projections pointing to a rate hike in 2023, with some officials predicting hikes as early as next year.

A majority of FOMC members noted that inflation risks were now on the upside and that the general tone of the meeting was more hawkish than many market watchers had anticipated.

In the weeks that followed, yields on 10- and 30-year Treasuries fell, and reflation trading in economically sensitive sectors like financials, energy and materials underperformed while tech stocks. straightened up.

Normally, when inflation fears rise, nominal bond yields follow a similar path, but that was not the case this time around.

This paradoxical market reaction can be explained by the market view that the Fed will make a policy error by raising interest rates too early, thereby derailing the economic recovery.

So says Mark Haefele, chief investment officer of UBS Global Wealth Management, who believes investors should not fear a Fed tightening or a political incident that kills the economic recovery.

CIO sees Treasury yields rebound in H2 2021, with the 10-year rising to 2% by year-end, in part due to easing downside technical factors in the bond market .

The strong financial position of U.S. consumers, which was bolstered by fiscal stimulus and reduced spending levels during the pandemic, combined with the need for businesses to use CAPEX to replace lost transactions, will support economic momentum. , said Haefele.

In a June 16 note to clients, Haefele, who heads investment research at the world’s largest wealth management firm, said he preferred a risk position for investors and believed the economic recovery was ongoing.

“We don’t think the ‘secular stagnation’ narrative is supported by the underlying data just yet. We remain positive on risky assets, expect yields to rise by the end of the year and continue. to advocate a positioning for reopening and recovery, “Haefele wrote.

The CIO then detailed five strategies that will help investors position their portfolios in this paradoxical market environment and benefit from the return of the reflation trade.

1) Position for reopening and recovery

Haefele recommended investors increase their exposure to energy and financials until the end of the year. The IOC said energy stocks would benefit from rising oil prices in the second half of 2021, while financials would benefit from a boost from 10-year Treasury yields to 2%.

Haefele no longer prefers small cap stocks as they typically outperform early in economic rebounds, but lag behind as the rally matures. The CIO and UBS now recommend that investors look to quality mid-cap stocks while reducing exposure to small caps.

2) Look for opportunities in Asia

Haefele sees opportunities in emerging Asian markets due to the recent underperformance, which has created attractive valuations amid strong earnings.

The IOC also believes that Chinese equities may outperform in the second half of 2021 thanks to the adoption by the People’s Bank of China (PBoC) of a more “pro-growth” monetary policy. The bank cut the reserve requirement ratio (RRR) of nearly all Chinese banks by 50 basis points earlier this month.

Haefele noted that Japanese stocks could offer the most benefit to investors in Asia, however. The island nation’s stock market is exposed to global growth and oriented towards cyclical sectors that the IOC says will continue to outperform. Japanese stocks should also benefit from a weaker yen and high operating leverage, Haefele said.

UBS Cyclical Japan

3) Position for structural growth

Haefele said investors should diversify away from overbought large-cap tech stocks and into small and mid-cap stocks that will benefit from structural growth. The IOC recommended names in the growing space of digital subscriptions in particular.

Investors can consider an ETF like the iShares Digitization UCITS ETF, which tracks an index of developed and emerging market companies generating income from digitization, as a proxy for Haefele’s recommendation.

4) Protect against inflation

Although Haefele believes inflation is likely to be “transient,” as the Fed has described it, the IOC said investors should add exposure to stocks with pricing power, to short bonds with pricing power. high yield and to commodities such as oil to defend against longer term potential. -term inflation.

5) protect yourself against downside risks

Haefele recommended investors continue to overweight risky assets, but suggested a regular review of portfolios if there is excessive risk. The IOC said investors might consider locking in earnings from stocks that have outperformed, adding downside protection in the form of hedge funds or derivatives, or even diversifying into defensive stocks to hedge against the downside risk of an increase in the delta variant of COVID-19 or more sustained inflation.


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