Published January 23, 2010

UBS bearish about second half of 2010

There is still the risk of a business cycle setback by then, warns bank chief economist Andreas Hofert


MAKE no mistake. Financial markets may have rebounded, but there is still the risk of a business cycle setback in the second half of this year.

Speaking to BT yesterday, UBS chief economist Andreas Hofert said that the Western economic recovery has been driven by the twin engines of government spending and inventory cycle thus far. But 'both will peter out by the middle of 2010, and then there is the problem of who will take on those roles after that'.

Either the big companies have to ramp up their investments, he said, or consumption levels have to go up, but the economist did not think that was likely to happen, especially with unemployment rates running at double-digit rates in some markets. 'So there is a big risk of the Western economies going back into significant weakness in the second half of 2010.' However, that does not apply to emerging markets such as China and India, which explains why the bank is more positive on Asian economies.

Meanwhile, it appears that the large global imbalances that prevailed before the crisis, have returned to haunt the markets.

'There was a huge disequilibrium between countries with current account surplus - Japan, Germany and China, and those that were in deficits - the US, the UK and Spain,' he said. 'The financial crisis has reduced this disequilibrium, but lately it has picked up again.' This implies that the world may end up with a situation of serious global imbalances again in three to five years' time.

In this environment, UBS favours equities over government bonds, even though it acknowledges that stock valuations are slightly less attractive than a year ago. This is especially so for emerging market stocks, and selective developed markets. For example, German stocks are preferred over UK equities. Meanwhile, the Swiss bank favours corporate bonds as they still exhibit good appreciation potential, due to the narrowing yield differentials. On the commodities front, UBS adopts a neutral view towards gold, even though it does not rule out possible rises in the yellow metal's price. As for crude oil, prices are expected to stay high but there is little room for further appreciation.