Macro Monthly Podcast with UBS Asset Management

0:00Music Glad to be back to present the UBS asset management monthly macro podcast. As you know each month, we look forward to hearing from top investment professionals from the UBS asset management multi-asset team. Joining us for this month's episode glad to welcome back Evan Brown, Evan is head of global multi-asset portfolio management for the Americas and Asia. Joining us as well, Mark Whitman, multi-asset specialist from UBS asset management. So with that, Evan, Mark, thank you both for spending some time today with air listeners, air advisors and with that, Mark, let me now turn it over to you to lead today's conversation with Evan. Thanks Ben and glad to be part of today's topic. So today we're going to cover my latest macro and asset allocation views from Evan and team. So jumping right into the main topic on investors' minds as we are now five weeks into the Iran War and what's your latest view on some of the economic impacts associated with it?

1:05Thanks Mark and we should probably timestamp this. It's April 1st at 130 and as we all know, the news seems to flip every hour and with that, the outlook for the economy and markets. I think big picture, we're undergoing a supply shock and that's where inflation is going up and growth is going down and the longer the straight of hormones is essentially closed, the more painful for the global economy. The disproportionately negative for Asian Europe, they rely heavily on on Middle East imports of oil and gas, the US is relatively better off given our energy and dependence. But what I'd say is that the starting points matter. So the economy, global economy was in reasonably good shape before we had this shock. So US tax rebates are hitting consumers, while it's right at this time productivity has been improving over across the Atlantic and germinated physical stimulus starting to hit the economy and global manufacturing was showing signs of accelerating.

2:18So if you're going to get a shock, this was a reasonably well-positioned economy time to get in and we think that the economy can model through it, obviously depends on how long the straight is all but closed and if it's closed a few months from now or if there's materially more damage to growth energy infrastructure. We reconsider that view but does look like there's some incremental movement towards diplomacy and in de-escalation and if that's the case, then a lot of the damage should be contained. It's meaningful but still contained. So won't be as ideal as we thought coming into the year with strong growth and expecting sharply declining inflation but maybe we downgrade our outlook for growth good enough. And inflation elevated but gradually on its way towards easing.

3:23Thanks Evan and speaking to you and we're continuing with the Iran War and speaking to your first point about the rapidly changing expectations as a result of the war we've also seen central bank rate cut expectations change a bit with markets reflecting either an increased chance of no rate cuts in 2026 and some even anticipating a slight probability of a hike this year. What is your view on how the Fed will ultimately weigh inflation versus growth implications of these higher energy prices? Yeah, so some of the most involved price action we've seen across assets has been in the rates market to your point. I mean the market was pricing multiple cuts this year by the Fed and then at one point, you know, especially price in a hike this year and now about about flat in Europe in the UK pricing in a few hikes. There is a world there certainly worlds where the Fed hikes this year but we think that's pretty unlikely. I mean when you get a supply shock like we're having right now the Fed typically looks through it as long as inflation expectations are contained and they are contained.

4:32And so you know market participants generally the way they're pricing inflation in the market to see this little shock is it's more of a one off and not something that's going to feed through more more broadly. Overall inflation it remains a bit stubborn but we are seeing enough downward pressure on shelter which makes up a big part of the inflation basket. And you know still in a generally soft wage growth environment and we think that should keep the Fed within using bias rather than a tightening bias. This is more of a postponement of rate cuts we think than having no rate cuts and again we think a hike is pretty unlikely at this stage. And continuing with the topic of inflation and given some of the this kind of inflationary episode and we've seen periods of stocks and bonds sell off at the same time where some are likening you know today's experience to 2022.

5:35How would you compare this shock this missionary shock to the experience a few years ago. So the similarity relative to 2022 is you had a war driven energy supply shock it was rushing you create and then he run now but the state of the economy and policy very different this year versus 2022 2022 inflation pressures were much much broader you had. Of course a lot of fiscal stimulus right a lot of checks and gone out to people and then all of a sudden an opening up the big economy so that money just getting unleashed on the services sector you also had a lot of supply chain constraints as with covid you know a number of plants were we're shut down and and people are demanding goods stuck at home and and. So we think goods and then in services it was just a much broader inflation shock you also had very tight labor market which we're leading to wage pressures and inflation expectations are really starting to rise all while rates you know said said was essentially a zero whereas today you know where they are rates are mildly restricted so.

6:57It was a much broader inflationary environment and the market need to reprise rates much more dramatically today rates are comfortably higher than that the inflation shock is narrower so we think there are a number of differences suggested to us that even even as we've had this kind of environment with bonds and stocks like selling off at the same time. This is a much narrower version of what we saw in 2022 and hopefully much more short live. Thanks Evan I think that's really helpful context and a little bit reassuring as well so given that macro backdrop that we discussed maybe from the permanent class perspective what's your current view on equities. Yeah we we remain overweight equities I mean we did reduce the size of our equity overweight a few weeks ago just because there's a wide range of outcomes regarding the war and we were still very much in escalation phase.

7:59Right now it seems we're more in a de escalation phase of even as things stay fluid. I think it's important to acknowledge that throughout this earnings growth has been really strong and in fact earnings revisions have been moving higher and so even as the market has has has sold off. With that earnings growth and earnings expectations remaining high you've seen a 15% decline in valuations you know the 12 month 4p down 15%. That is a pretty big drop in in valuation so as long as you're not expecting a sharp slow down or recession as long as this doesn't go off the rails then the market looks reasonably valued here. Thanks Evan that's really helpful context and thank you again for sharing today.

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