It’s “show-time” for corporate earnings says UBS’s Bill O’Neill

2nd April 2014


The economic recovery is unlikely to see a fall back because all the major economies are growing at the same time says Bill O’Neill, head of the chief investment office of UBS Wealth Management.

Speaking in London this week, O’Neill said: “We are not ‘nervous nellies’ on the recovery. What is different is that you have all the major economies growing at the same time. The headlines don’t grab the fact that the spill over effects are very significant. They come through in trade, they come through in capital flows. If all economies are growing at the same time, it is less likely we are going to get a fall back.”

Added to this, O’Neill says is the fact that the UK and US recoveries are now broad based while even three or four years into the recovery we have had very low levels of inflation.

“My sense is that one of the interesting things is that interest rates are likely to remain low for a time. In the US, we have rates unlikely to go up until next mid year, and in the UK the beginning of next year. In terms of the backdrop, growth will be modest, inflation pressures will be moderate, interest rates will remain low and any move will be gradual.”

O’Neill says that as a result bond markets won’t sell off to the heavens. He adds: “There will be an adjustment but not hugely far away from what will represent the peak of bond market yields. If will be ‘duh’ rather than ‘dire’, if you keep the interest rate risk limited, it is not going to be a disastrous outcome.”

He suggests that we may see a re-rating in equities as the market gets more comfortable about the pace of the hikes in 2015.

“This really is the ‘show me’ era when corporates actually deliver. The likelihood is that it will be those markets which really deliver or even over-deliver that will produce the better returns. It is the earnings phase of the cycle”.

In terms of over-weighting, he says: “We are driven towards the US market as the best quality source of earnings momentum and the Eurozone. We are underweight the UK, largely because the UK is susceptible to EM themes, it is vulnerable in terms of the impact of the currency on translated sterling earnings, and the market is very defensive, there’s lots of oil. We like mid caps more, though we like sterling and the UK property market.

“Beyond that in terms of the earnings driven theme, you have to be a bit more forensic. There is still a lot of attractive yield in risk premium markets. There are still anomalies. US high yield look generous. Default rates are not going to 1.5% but remain around a 0.5%. There is no prospect of massive deterioration.

“There are opportunities in emerging market debt – corporate and sovereign. There has been mispricing. You could argue that the hunt for yield is being satisfied by anomalies where stock prices have been misaligned. A relative value play i.e. long short funds which are less sensitive to the direction of the market should be looked at again”.

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