Simon Smiles, UBS Wealth Management's global chief investment officer for ultra high net worth, spends much of his time travelling but as he trots around the globe he sees fewer solid investment stories.
The Swiss franc was one of them until the Swiss National Bank unexpectedly abandoned the cap on the currency's value against the euro in January, causing it to appreciate sharply and hitting Swiss exporters in the process.
The one exception to Zurich-based Smiles's downbeat prognosis is the US economy. Data last week showed US GDP growth was weighed down by severe weather conditions in the final quarter of 2014 but still does not detract from the fact the world's biggest economy put in its best performance last year since 2010.
“[Of the] incremental acceleration in global growth expected this year, two-thirds of that is coming from the US. Emerging markets is detracting from the growth impulse,” said Smiles, who advises clients with more than Sfr50 million ($54 million) of assets.
Smiles is overweight US stocks and bearish on emerging markets assets, including bonds and equities. Concerns that an interest rate hike could spark sharp outflows and currency depreciation hover over markets like Indonesia.
Despite recent rises in the US stock market, Smiles believes US share valuations remain inexpensive. At present, US citizen stock ownership lies at around 54% of the population compared with 65% in 2007 – suggesting there isn’t a lot of froth. “The profitability of US corporates remain compelling and valuations are not stretched,” he said.
In a world where key central bank policy is diverging there is also likely to be more dispersion in asset prices. The European Central Bank embarked on a programme of quantitative easing on January 22, announcing that it will buy €60 billion in government bonds each month until September-end 2016, while the US Federal Reserve is seen poised to raise interest rates in the third quarter of this year.
“In a world where central bank policy has been in one direction, pushing asset prices up, dispersion has been low," Smiles said. "[But] where you have these divergences, [we see] greater difference between asset price returns.”
China
Despite the rapid expansion of credit in China and concerns over bad loans as the Chinese economy slows, Smiles does not anticipate a hard landing in China and said that the regulators have done an incredible job of managing the huge incongruities within the system, including the high levels of leverage and other excesses.
“Yes, there are imbalances there. There are issues at a micro level. Some of the property bonds are under pressure... [But] we don’t see China as something that is going to derail the wider risk story,” Smiles said.
However, that doesn't mean he finds Chinese assets attractive. After recent gains in the A-share market, he regards valuations as stretched and is advising clients to take profit.
While the H-share market – referring to Hong Kong-listed Chinese companies – have not enjoyed a similarly strong run, Smiles said his preferred sector of consumer-related stocks remained expensive.
“The reason why the headline index is so cheap is because the energy and bank stocks are trading at depressed multiples. It’s difficult for us to allocate to the market despite the apparent cheapness,” Smiles said.
Smiles who meets with the Swiss bank’s ultra wealthy clients regularly notes that Chinese clients are keener to punt stocks than their European peers, and that generally there is lower propensity to take a disciplined portfolio management approach to investing.
“The gambling nature, the short-termism and the willingness to trade in and out of stocks quickly is much more prevalent here than in Switzerland or the UK,” Smiles said.
“Here, very few conversations tend to be around 'what are the best stocks I can hold for five years?'. [They] tend to be around..give me a list of stocks that can go up by 20%,” he added.
However, Smiles said that holding high proportions of cash was ubiquitous among the very rich, standing at almost 30% for UBS’s global book, thanks in part to the 2008-2009 global financial crisis.
“The crisis was so traumatic, the benefit of liquidity during the crisis was so great, that the premium associated with having cash has gone up,” Smiles said.
