Make tactical gains from eurozone assets but don't over-rely on cheap money: UBS
Singapore
UBS sees tactical opportunity in investing in eurozone assets in this period of easy monetary policy, and has shifted some funds from its US portfolio, the latest letter from its chief investment office showed. But the bank also flagged that over-reliance on cheap money could prompt problems down the road.
"Many of its problems remain, including the slow pace of structural reform in the likes of France and Italy along with the often acrimonious debt talks with Greece," said Mark Haefele, global chief investment officer, wealth management, at UBS.
"But the current configuration of global policies is positive for assets such as equities and high yield credit in the eurozone."
The European Central Bank's (ECB) quantitative easing (QE) move is having a greater financial impact than that from "early-starter" Federal Reserve, said Mr Haefele.
"The ECB's programme is large relative to net supply," he noted, given the smaller equity and bond market in Europe. "Also, ECB monetary easing is coming after government austerity measures, so the safe assets being purchased are much scarcer than they ever were in the US."
The ECB is buying 720 billion euros (S$1.06 trillion) worth of bonds a year, which is more than double the net new supply of government bonds and credit of 300 billion euros.
By comparison, the bond-buying in the US only absorbed two-thirds of the net issuance of Treasuries, mortgage-backed securities and credit.
Given the tight supply, existing bondholders are demanding higher prices. And as investors head up the risk curve, more than 35 billion euros have moved into European equity funds this year, pushing up German and Italian markets by about 20 per cent, said Mr Haefele. Meanwhile, the decline in the euro should boost earnings further.
"When the Fed launched QE in November 2008, US markets were in turmoil and the economy was shrinking sharply," he added. "The ECB is stepping up asset purchases at a time of accelerating growth."
By contrast, the strength of the US dollar, and uncertainty about the investment outlook caused by volatile oil prices could weigh down growth and earnings in America. "In recent weeks, US equities have begun to move opposite to the US dollar, reflecting the uncertainty," said Mr Haefele, noting that the bank has scaled back its overweight position.
"Longer term I am concerned that investors might get carried away by this deluge of cheap money," he added. "At some point ... the ECB - along with the legion of other central banks currently easing policy - will tighten again. If markets, companies, and governments have grown over-reliant on cheap money, we could face major difficulties."
