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Q&A: Alex Friedman, Global CIO, UBS Wealth Management

Friedman joined UBS in March 2011, from his former role as CFO for the Bill and Melinda Gates Foundation.

Q Where will growth come from in 2014? 


The US is the furthest along in terms of deleveraging and household debt is now at around 2002 levels. We expect 3% GDP growth for the US; Europe should grow by around 1% as the fiscal austerity drag is waning. And with demand picking up for exports we expect 5% GDP growth in emerging markets. We don’t think equity markets will continue to return double digits – a more reasonable target in the US would be 7% to 8%. Europe looks cheaper than the US but it is fragile and comes with more risk.

Q What advice are you giving clients on their fixed-income allocation? 


We expect poor total returns for government bonds, and so credit should play a more important role. There will be higher returns on investment grade through to five years although some drag because of rising interest rates – so returns will be more like 1% to 2%. We also like high yield. 

Q To what extent will absolute-return investments have a place in a client portfolio this year? 


Hedge funds haven’t done well over the past five years as it has been a politically driven market. Long/short and event-driven strategies fare better but we’re not expecting blow-out returns. In any long-term portfolio we encourage a 12% to 15% allocation to hedge funds because it makes sense to allocate to uncorrelated assets in a low-return environment.

Q What regional opportunities do you foresee this year? 


We are overweight the US and neutral on emerging markets – in equities and high yield. Emerging markets will benefit, but the larger countries, such as the BRICs, still have a big challenge in terms of structural changes as they converge more to developed markets. We are still overweight China and Korea and Mexico (the latter for its corporate earnings and energy reform). We are also overweight the eurozone.

Q How long do you foresee the window of opportunity lasting?


We have a tactical time horizon of six months and see this window as remaining open if risks do not increase. We would stay overweight US high yield and equities, underweight UK and Swiss equities as they are more defensive and in the UK sterling is a drag and corporate earnings are outside the UK. In Europe there are some risk factors: the Italian election for example. On the whole geopolitical risks are low, but we might be surprised by territorial disputes between Japan and China and Middle Eastern disputes. China is always a risk because the rapid credit growth might be a bubble.

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