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A 'home bias' can work against investors
YEAR 2014 is for risk assets, says UBS group managing director Mark Haefele. But in order to benefit, Asian investors should diversify and seek to break out of their "home bias".
Home bias refers to a tendency among investors to invest largely in domestic equities.
Mr Haefele, who is also UBS' global head of investments, says the bank's preferred regions for equities are the US and Europe. He is cautious about Asia. "We don't think US equities are in a bubble. At about 16.5 times earnings, that's within the range of what is normal. Valuations aren't stretched and there is a supportive macro backdrop. We expect total returns of 6 to 7 per cent for the US, and we don't think you need to get a lot of valuation expansion. We think just an earnings growth of 8 per cent can help to achieve most of the target."
UBS today hosts a pan-Asian investment conference, the UBS Wealth Insights, which is expected to be attended by close to 3,000 guests.
Mr Haefele says Europe is also benefiting from a supportive macro environment. In particular, cyclical export stocks are a "little cheaper" than those in the US, and have the potential for a 10 per cent earnings growth. "If things go as planned, we think investors will continue to allocate incremental capital from the US towards Europe."
Asia and the developing or emerging markets, however, face headwinds. "There is about a 20 to 30 per cent discount on developing markets . . . We're not sure valuations will normalise this year because many investors globally are still very cautious about how (QE) tapering in the US and the withdrawal of liquidity will affect emerging markets as a whole and individual countries.
"We're not sure the valuation gap will close in the next six months; we're neutral the emerging markets. But the valuation gap is wide enough now that it doesn't make sense to underweight the developing markets."
Among the emerging markets, UBS has overweight China, thanks to "relatively compelling" valuations and confidence in reforms. The reforms announced last November included an initiative that will see the central government taking over responsibility of infrastructure projects from local governments. Also proposed was an "early warning system" to sound an alert when local debt levels approach excessive levels.
Mr Haefele said: "From what we've seen, the reforms initiated are long term, but are headed in the right direction . . . They've also done a lot in the management of credit that convinced a lot of global investors that they have enough leverage to control the economy to the point where it is not going to upset the rest of the world."
China's growth is expected to moderate to 7.5 per cent. "There are still issues, yes. But there has been a stabilisation of the growth rate. Inflation has been under control, giving policymakers more room to correct mistakes."
On clients' risk appetite, he says the "great rotation" out of bonds into equities has yet to materialise.
"What we've seen is some money coming out of cash into equity markets, but among clients it's relatively small . . . It's not like clients have fully embraced the risk appetite we think they should have at this point in the cycle. We continue to encourage clients to look at their portfolios to make sure they take appropriate risks because things have changed so much from the time they had just a bond portfolio."
He says the bank continues to persuade clients to diversify. "It's the only free-lunch (way to invest). Why have a portfolio of only Asian equities, for example, when we see other dynamics around the world, where for the same or better reward, you can take lower risk."
Commodities have been taken out of the bank's strategic asset allocation and are now part of the alternative assets bucket. Dominic Schnider, UBS executive director and head of commodity research, says more pain lies ahead for gold investors as the metal is repriced from its status as a currency towards a commodity. "Maybe we don't need so much production any more. That means miners need to be disincentivised, and it means pain in the balance sheets. We're looking at gold at US$1,050 to US$1,150 over six to 12 months.
"If there is a spike in gold prices, investors should re-think their allocation, especially those who overdid it in the past."
Gold traded as high as US$1,692 a year ago. It has been weakening, and gold spot price yesterday was at US$1,249.