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UBS: October Outlook, Time To Buy US & Eurozone
Aspire | 02 October 2015
By: Raymond Leung
Articles (142) Profile

The Chief Investment Officer (CIO) of UBS has released a report on the global market outlook for the month of October. In view of the increasing volatility, he feels that the current market is facing a mid-market slowdown but not a recession. This is mainly contributed by better economic data from the US and gradual recovery in China. In addition, further stimulus can be expected from the Eurozone and Japan.

China

Source: China Caixin Manufacturing PMI, Investing.com

The manufacturing sector in China remains weak as the Caixin Flash Purchasing Managers Index (PMI) is in its 6.5 years low. To counter the weak economic conditions, the People’s Bank of China (PBOC) has put in place several measures to stimulate the market. The stimulus includes increased fiscal spending, Reserve Requirement Ratio (RRR) cut and credit asset securitisation scheme. These stimulus measures will take some time before they are able to be reflected on China’s economic data.

Despite the lower manufacturing data, there are other signs of economic recovery as the housing market begins to stabilise. Economists from the PBOC expressed that they are on target to meet the growth target of 7 percent. UBS continues to state emerging market equities including the Chinese market as underweight.

Eurozone

Source: European Manufacturing PMI, Investing.com

Quantitative easing (QE) in the Eurozone has unexpectedly had minimal effects on its market as troubles from the emerging markets spill over. President of the European Central Bank (ECB), Mario Draghi, has expressed his willingness to put in place stronger monetary policies in terms of size, composition and duration to further stimulate the market.

Manufacturing continues to remain slow in Europe but growth was seen in the service sector. With a low inflation rate of 0.9 percent, Draghi will not be constrained by the inflation when performing additional stimulus to the market. UBS reiterated that Eurozone’s equities and high yield bonds are “overweight”. The preference lies in the GBP over the EUR.

Japan

Source: Inflation Rate of Japan, TradingEconomics.com

Investors are doubting the Japanese government’s ability to stimulate growth as growth and inflation continue to remain weak. In the first quarter of the year, Japan’s GDP spiked by 4.5 percent but contracted by 1.2 percent on Q2 due to poor business investment and consumer spending.

More measures to stimulate the market can be expected from the Bank of Japan (BOJ) as inflation continues to remain low. Inflation falls short of the 2 percent target as core inflation (including energy but excluding food) stands at 0%. Japanese equities market is expected to benefit strongly from the QE as BOJ’s asset purchase program is expected to increase from the current JPY 80 trillion per year.

US

Source: US ISM PMI, TradingEconomics.com

Manufacturing in the US slowed down as the Institute for Supply Management (ISM) reported that PMI has fallen to 51.1, its 2.5 years low. However, the service sector remains healthy and job data stays firm with unemployment rate declining to 5.1 percent. The mixed data within the country, along with concerns of a weaker growth in China and volatility in the financial market drove the Fed to hold its interest rate hike.

Overall, economic data from US has so far been encouraging despite the lower manufacturing data. Fed interest rate is still expected to increase this year when the economic condition in China improves. UBS’s call in US equities and high yield bonds remains overweight, while it holds a bearish view towards high grade bonds. The USD is expected to remain strong against most major currencies.

Trained in fund management, Raymond is familiar with shares and various investment vehicles.

Please click here for more information about this author.


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