Though a “broad-based recovery” is underway and markets have rebounded, “investors remain deeply apprehensive about the future.” But strategists at UBS say there are “extraordinary opportunities” amid the “challenges” investors face as they imagine “The Decade Ahead,” a new white paper released in February.
Far from a tome touting the latest securitizations from the big bank, UBS Chief Investment Strategist and Head, Wealth Management Research, Americas, Mike Ryan, and Head, Thematic Research Wealth Management Research, Americas, Kurt Reiman, and a large research team offer their long-term views at the turn of the decade.
Acknowledging deep global social and environmental problems, that “1.8 billion people are mired in poverty and lack basic sanitation, access to medicine and essential nutrition,” and that pollution of air and “water resources may also pose threats to greater prosperity,” the paper goes on to say that the future is “brighter,” although it “will take work.”
The report asserts that the U.S. will still be “the leader of the pack,” in the new decade but tempers this, reminding readers that this country needs “fiscal, regulatory and education reform.” China will, surpassing Japan as the number-two economy behind the U.S., challenge the U.S. in “economic leadership,” according to the report.
Geopolitics, Risk and Return
Geopolitics is an issue that will “keep risk premiums elevated” for equities and fixed income as the risk of conflict continues. The authors advise incorporating “geopolitics into an investment process.” Still on the international front, the report also advises of an allocation shift into emerging markets, citing a “persistent growth advantage” as the “most compelling catalyst” for this allocation.
The report notes that philanthropy and socially responsible investing (SRI) will “make an impact,” and that companies will, more and more, “embrace sustainable business practices.” They explain the changes social media has had on sharpening and enhancing the impact of smaller donors, and assert that philanthropy increasingly is judged “on results.”
Investing in the New Decade
Drilling down into investment conclusions, the report states that it expects inflation to “reemerge” but not soar over the next decade. Stocks will be the favored risk-adjusted return vehicle, compared with bonds; and the report predicts rates will rise because of inflation, “structural deficits” and rising “debt burdens.” Continue to use commodities for “diversification” in portfolios, as well as “price appreciation,” the report offers.
A Note About Bond Portfolios
The report also says that “passive buy-and-hold” exposure to bonds is “no longer appropriate,” and that active management is necessary, citing “sovereign default risks, emerging challenges in municipal credit, and rising inflation pressures.”
There is much more detail in the 89-page “The Decade Ahead,” report; it is thoughtfully written and a worthwhile read for many advisors.