The man who directs Europe's wealth

From Zurich, Dr Klaus Wellershoff helps allocate UBS private bank''s enormous funds. Here''s where he thinks the world is going.

Dr Klaus Wellershoff is the chief economist for UBS Wealth Management and Business Banking. The Zurich-based economist also has a key role allocating the private bank's massive portfolio of private client wealth. Here he gives his views on the current state of world affairs.

There is a lot of uncertainty right now geopolitically. What are you advising private clients to do?

Wellershoff: You have to take a step back from the uncertainty and focus on those things that are really important in the medium term. You have to look at things like basic valuations. The world is driven by hope, fear and greed, and things tend to overshoot and get exaggerated. As a private investor you want to be anti-cyclical to these overshooting events.

Thinking about the medium to long term, do you see a lot of value in Asia thanks to its growth potential?

The main question for an international investor is not whether there is potential, but whether if you invest your money you are going to get it back, or you can be paid dividends. That explains why there is a higher risk premium for investments in Asia.

It is fairly evident that China is rapidly becoming the world's pre-eminent manufacturing economy. Do you have ideas how to play that story over the medium term, in the least risky way?

It's a difficult question to answer at this time. China offers neither the structures nor the liquidity required to attract large-scale investment by non-Asian investors.

One view is that the China growth story will be mirrored in rising commodity prices as the domestic Chinese economy grows and consumes more.

China is already big. On purchasing power parity demand, it has already outgrown Japan. Both countries still account for only around 12% of world demand. So if you wish to play the commodities story, you would be better advised to focus on the US or Europe than on China or Asia. From that perspective, commodities are not really a direct play.

In terms of currency, should clients move into euros and out of dollars?

In terms of currency alone, yes. We are seeing an unwinding of the overvalued US dollar and, in our view, the fair value between the euro and the US dollar is probably around 1.11.

In terms of investable euro instruments, we are a little more sceptical. The cyclical problems besetting Europe have, come on top of deep unresolved structural problems.

So you believe US equities will still outperform European equities?

This seems very likely. The US seems to be the better bet.

What is the mood of the client base?

They feel the uncertainty and this translates into inaction. There is a lack of liquidity on the part of smaller private clients; they are not behaving in a counter-cyclical way.

Are they looking at gold?

Gold has not really caught on in Europe. It is more of an Asian story. Our clients haven't flown to quality; they are simply doing nothing.

On the other hand, European clients have always been heavily invested in bonds and returns from the bond markets have been good for three years.

Will bonds outperform equities again this year?

No. We believe that rally is over. If they did, then my advice is we should all buy farms and retire.

The correction in equity markets has gone so far that most markets really look attractive, particularly relative to investment grade bond prices.

Equity markets look attractive, and the current uncertainty and some of the economic disappointment will evaporate over the course of the year.

Are you advising clients in Europe to up their exposure to non-Japan Asia?

Within the emerging markets proportion of our portfolio and in light of our belief that there is worse to come in Latin America, we are overweighting Asia. However, at the moment Asia is not a meaningful component within a global portfolio.

But from the perspective of a longer-term investor, shouldn't you be putting more of your capital where the highest growth looks likely to occur - ie Asia?

It really depends on your mandate and your benchmark. This restricts you. The market capitalization becomes a reflection of the future of an area. If you are managing money for absolute return I would agree with you.

Liquidity is an issue for investor the size of UBS. There are only 80 stocks in non-Japan Asia we can buy for our discretionary portfolios.

Given so many of our Asian readers own property in London, do you expect a massive correction in London property prices or will it deflate slowly, if at all?

When you talk to Bank of England representatives these days, you tend to talk more about real estate markets than anything else. This tells me there are significant risks. Bubbles don't last forever, and with the financial services industry not doing well the likelihood of price declines in Greater London real estate are quite high.