The coming year will bring increased volatility but no recession, UBS predicts in its “2019 Year Ahead” outlook report.
Because of that, investors should stay invested and look for opportunities that the uncertain market will provide, the financial firm advised.
“On balance, overweight equity exposure, combined with relative value trades, and portfolio hedges is the right positioning for the start of 2019,” said Mark Haefele, chief investment officer global wealth management at UBS.
Global economic growth for the coming year will slow slightly to 3.6 percent, down from the 3.8 percent growth this year. At the same time, inflation will remain contained, UBS said.
The next bear market, whenever it occurs, will be an average pull back, not the drastic correction or recession that were seen in the last two decades, the firm said.
“In comparison to the extreme equity valuations of 2000 leading to the dot.com bust, or the financial sector leverage that prevailed in 2007, the excesses this time appear more contained. We believe that the next equity bear market is likely to be an average bear, with a 25 percent to 30 percent drop for global equities from the market peak,” the report said.
Investing for the coming year should be diversified across countries, sectors and market drivers in order to withstand worldwide political factors including the US-China trade negotiations, the Italian budget and Brexit, to name only a few, the firm said.
“Look for value and quality. We expect U.S. and emerging market value stocks to outperform growth stocks, reversing their 2018 underperformance. Meanwhile quality companies with higher profitability, lower financial leverage, and less earnings variability than average should withstand volatility better than the overall market,” the report said.
UBS said an attractive policy now is an equity buy-write strategy, which involves purchasing a stock or basket of stocks while systematically selling call options. “Over an economic cycle, equity buy-write strategies generate attractive risk-adjusted returns, as they capture both the equity and volatility risk premiums. They are most appealing in current market conditions, when volatility is higher and prospective equity returns are moderate,” the report said.
For particular sectors, financials could be set to outperform in the U.S. and China, and energy will offer value in the U.S. and Europe, with oil prices poised to recover in early 2019, UBS said.