Traditional Asset Managers Behind the Curve

A report that a major asset manager is just now reducing equity exposure and moving away from emerging markets is a sign that traditional asset managers are behind the curve, reports Landon Whaley

This week’s Headline Risk comes courtesy of UBS, who “just turned bearish on stocks.” Everything about this shift in UBS’ outlook wreaks of the Old Institution, and it’s time to take these relics to the data-dependent woodshed.

What Bloomberg deemed to be UBS “[turning] bearish on stocks,” was, in fact, nothing more than the wealth manager cutting back its equity exposure relative to bonds. The Chief Investment Officer, Mark Haefele, said: “Risks to the global economy and markets have increased, following a renewed escalation in U.S.-China trade tensions.”

Hey Mark, can you please define “risks” because if you think risks weren’t rising until the latest Trump tweet about China then how in the world did you get the job overseeing $2.8 trillion in assets?!

Were the “risks” not already elevated given the United States has been in a Winter Fundamental Gravity for two of the last four quarters? How about the risk arising from the Eurozone being in Winter for the last four consecutive quarters? Or the fact that China, Brazil, India, Denmark, Mexico, Philippines, and South Africa are all currently in Winter, and have been for three of the last four quarters?

A deeper dive unearths that UBS pared-back emerging market equities to reach their underweight stock positioning. Haefele said the move was made because emerging market equities “are more exposed to heightened market volatility, a slowing global economy, and heightened trade tensions.”

The CIO of the world’s largest asset manager, is just now paring back emerging market equity exposure! Many emerging market economies have been in growth slowing regimes since Q3 2017, two whole years! Columbia (Fall) slipped into a growth slowing regime during Q3 2017 as did Hong Kong (Winter), Mexico (Fall), Portugal (Winter), Russia (Winter), and South Africa (Winter).

Even China’s growth began slowing in mid-2017 and has now toggled between Fall and Winter for nine consecutive quarters. The Eurozone joined in the fun in Q4 2017 and has been in a similar growth slowing regime ever since. Do you think emerging markets stands a chance if two of the three largest economies on Earth are riding the economic struggle bus?

UBS has maintained a full allocation to emerging market equities while the MSCI Emerging Markets index has reflected the prevailing bearish FG delivering a -5.3% cumulative return over the last two years, while experiencing a maximum, crashworthy drawdown of -26.6%! These performance stats are pretty tame compared to some emerging market equity markets like South Korea, which have lost 17.4% cumulatively over the last two years and experienced a peak-to-trough move of -34.3%.

Haefele ended his Bloomberg interview by “[cautioning] against large equity underweights and [maintaining] his view that the United States can avoid a recession in 2020. And not everyone is ready to throw in the towel on stocks yet.”

Folks, I couldn’t make this s*&t up if I tried.

The headline risk bottom line is that the Old Institution-driven, traditional investment advisory relationship is horribly flawed and heavily skewed in their favor. One such flaw is the perpetual bullishness for stocks, no matter the environment or the drawdown cost. The fact that UBS (as well as others) has kept their clients exposed to emerging-market equities over the last two years is damn near criminal. The bearish economic data has been crystal clear and pervasive for 24 months!

This example of Old Institution incompetence highlights why it's so critical to remain data-dependent, process-driven and risk-conscious.

The equity markets in South Korea and South Africa have had a massive capitulation to the downside during August and are now taking a breather from their respective hangovers. However, two critical realities lead us to believe the next directional movement for these markets is lower. First, as we’ve discussed above, we’ve got Wintry conditions in many emerging-market economies, and those conditions are getting more and more frigid with each passing month. Second, the United States, Eurozone, and China are all in Winter as well, which doesn’t bode well for emerging markets until a shift into Spring or Summer occurs. The playbook remains to be opportunistically short EWY and EZA, or out entirely.

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