UBS to retail clients: Stock boom is over

Strategists recommend culling gains and putting more into commodities

By Jed Horowitz, Investment News

UBS AG's market strategists in the United States have become bearish on the stock market rally.

In a new report titled “Past the Sweet Spot,” the firm says equity markets are “unlikely to match the above-normal returns posted during the first quarter” and recommend that investors take some gains and reinvest in commodities.

“We're saying that you shouldn't expect the extraordinary returns that you've had for the past year and shouldn't bet on the equities rally continuing at the same speed,” said Stephen Freedman, a strategist at UBS Wealth Management Americas, who co-authored the report with the unit's research head, Michael Ryan.

The firm is putting more of a bias on commodities — base and precious metals, soft commodities such as coffee and sugar, and crude oil — based on its view that economic growth will be focused on emerging markets, where there is a voracious demand for the products, he said.

Commodities also have underperformed relative to both stocks and bonds recently, offering an attractive “entry point for investors looking to recommit funds,” the report said.

The analysts revised their model allocation formula to reflect their new outlook. They reduced their tactical weighting of stocks from moderate overweight to neutral, gave a stronger overweight to commodities, and tweaked their underweight allocation on fixed-income investments to a more positive “moderate underweight.”

For investors with moderate risk profiles and long-term return horizons, the UBS strategists now suggest a portfolio mix of 44% in stocks, with a bias toward emerging markets; 35.5% in U.S. and international bonds, with a preference in the U.S. for corporates over governments; 12% in alternative investments; 8% in commodities; and 0.5% in cash.

“With equity markets trading at or near fair value, stocks are unlikely to match the above-normal 6% returns realized during the first quarter,” the analysts wrote. “Stocks are now pricing in both a more robust recovery, as well as an accelerating earnings cycle, suggesting there is less of a margin for error on weaker-than-expected economic data and/or high-profile profit misses.

“In short, the ‘sweet spot' where the combination of cheap markets, extraordinary monetary policy measures and accelerating economic indicators drove markets sharply higher is now past.”

Mr. Freedman cautioned that UBS constructs seven different allocation models based on investor risk profiles. Too many investors, he added, remain overweighted in cash and have room to expand in equities.