Global economy divided in 2011

On the topic of the global economy, UBS has taken a Darwinian approach.

The splintered system is not considered fractured down the traditional lines of West versus East or Developed versus Developing, but down the line of the strong versus the weak. Record deficit levels and previously unheard of stimulus measures, as well as uneven levels of economic growth will force many countries to make hard political choices to shape the investment environment in 2011, and to come out ahead of the pack.

Equities are the preferred investment for 2010 since they are well positioned for a year of accommodative central banks and are able to weather the risks of inflation better than most, along with offering attractive value going into 2011. Companies that sell products or services, generate cash and have profit margins are considered unlikely to go out of fashion soon and UBS favors equities in the larger emerging markets and Core Europe, such as Germany.

In addition, No major currency is considered safe. During the US presidential campaign of 1992, “It’s the economy stupid” was a popular slogan, and currently, this is the reality faced by currency investors. In 2011, the traditional Big Four currencies (USD, EUR, GBP and JPY) will be significantly challenged and UBS is strongly recommending diversification. Investors may wish to consider the currencies of commodity producers and emerging markets as well.

The rules have also changed within fixed income, and government bonds are far from risk-free. Arguably, the fracturing of the global economy can be best seen in the developments of bonds issued by peripheral European economies. Therefore, UBS prefers debt held in countries with low public deficits and healthy external balances—with no respect to geography or development classification—and with a short to medium maturity.

Overall, with global economic imbalances and inflation on the horizon, investors should look beyond traditional equities and bonds. While they do have different risks, investments in commodities, hedge funds and real estatemay are viable options since they also have very different sources of return.

Staff

The staff of Advisor.ca have been covering news for financial advisors since 1998.