UBS warns of higher volatility in markets this year

Singapore

AMID analysts' consensus on the strength of the US economy and the greenback, among other calls, the markets are vulnerable to short-term data deviations, top executives from UBS said on the sidelines of the bank's investment conference on Thursday.

This comes with the global uncertainty surrounding diverging monetary policies. The Fed is set to raise rates from near-zero this year while major economies including the eurozone, China, Japan, and India are easing money supply.

Tan Min Lan, Asia-Pacific regional head, chief investment office, at UBS Wealth Management, warned of higher volatility in markets this year.

"Even though there is a lot of uncertainty about where growth is coming, where policy is going globally, if you look at consensus expectations, it's highly, highly clustered within a very tight band," Ms Tan told reporters. "Every time an incremental data point does not seem to validate these forecasts, the snapback can be very powerful. So our advice to clients is, if you want to trade...it has to be risk-controlled."

Edmund Koh, head of South-east Asia and Asia-Pacific Hub, UBS Wealth Management, said this could prompt clients to switch out of their bond positions, and into hedge funds, to tap on the extreme volatility. Such investments would be outside of clients' core portfolio, which should be diversified so as to weather the peak and trough, said Mr Koh. "A good (diversified) portfolio can yield about 4-6 per cent for this year," he added.

UBS, like many banks, expect the US to drive global growth, and an increase in rates this year. Mark Haefele, global chief investment officer, UBS Wealth Management, told clients at the conference that in the absence of growth around the world, the US equities market has stood out, and investors are willing to pay a premium for exposure to that GDP boost.

In the emerging markets space, investors should specifically seek out those that would benefit from US growth, said Curt Custard, head of global investment solutions, UBS Global Asset Management, at the event.

Given that current US inflation has yet to hit the Fed target of 2 per cent, the lift in rates this year is likely to be gradual, said Ms Tan. Historically, the Fed raises rates by about 200 basis points in one year. This time, it is likely to raise it by half of that - or 100 basis points - within the same timeframe, she added.

Ms Tan noted that investors looking for oil exposure should be ready to hold over the next 12-18 months, as shale supply is cut. At the equilibrium level, oil should be closer to US$80. If it falls to US$30, half of the loss-making shale producers will likely halt production given the negative cash flow.

"When you have a sudden slump in the price of such a widely traded commodity, the downside is no longer driven by fundamentals. In the short term, it is driven by fear and technicals," said Ms Tan.