Pain comes before the gain

Weaning the world's equities off the massive stimulus measures unleashed by the US central bank will be like getting an addict off drugs, according to a senior Swiss banker.

But Mr Alexander Friedman, global chief investment officer of UBS, added that the considerable short-term pain will likely be followed by long-term good.

He told The Sunday Times: "If you're addicted to a drug, people will tell you you need to get off the drug in order for your life to get better.

"But if you really are addicted, even if you know you have to get off it, you don't want to. And that's kind of how the markets are functioning."

Mr Friedman, who was in Singapore for an investment conference for some of the world's wealthiest family offices, noted that financial markets across the world are focused on the next move by the US Federal Reserve.

The key phrase is "tapering off" - a reference to Fed chairman Ben Bernanke's comments last month that its huge bond purchases may be slowed down if the US job rate improves.

The Fed has been buying US$85 billion (S$106 billion) in bonds a month to kick-start the sluggish economy, a monetary policy called quantitative easing (QE).

That flood of cash also flowed to global share markets, including Singapore's, but the improving US economy has raised fears that the tap is about to be turned off. Share prices have dived amid the uncertainty.

Mr Friedman said: "The market's trying to price what will happen at some point but nobody knows when, and it's doing it quickly."

UBS expects the latest round of QE to last until the middle of next year if economic conditions permit, with some tapering off in the final quarter of this year. The Swiss bank believes the Fed will keep interest rates low well into 2015.

Mr Friedman, who was previously the chief financial officer of the Bill and Melinda Gates Foundation, believes the tapering off will be positive for stocks in the long run.

He said: "Short-term, there'll probably be a bit of a panic, a correction, then there'll be a return to more clear thinking that actually they're tapering because there's a lot of confidence in the economy."

Mr Friedman is bullish on US stocks, especially the mid-caps, noting that "US economic data has improved and forecasts now show an acceleration of growth in 2013".

US companies have their costs under control and are likely to maintain historically high margins, with earnings growth of 5 per cent to 7 per cent projected to drive share prices higher, he noted.

He also believes that the greater domestic sales exposure of US mid-cap counters offers investors a better way to get a stake in the US economic recovery.

He added: "Thus, we believe that mid-cap companies will outperform large caps in the US over the next six to 12 months."

The shale gas energy revolution in the United States will also be a major boost for US shares in the medium term as it reduces costs and makes companies more competitive, said Mr Friedman.

The process of producing natural gas from shale rock has already cut US natural gas prices by 70 per cent.

UBS is also bullish on Japan stocks, forecasting earnings growth of 40 per cent this financial year as the yen weakens sharply against the US dollar.

The bank noted: "Japanese equities are supported by concerted efforts of the Bank of Japan and the new Abe government to boost economic growth and inflation, and yen weakness."

As for Asia, UBS believes regional equities are still attractively valued, noting that they are trading at a price-to-book ratio of 1.6, still 15 per cent lower than their 10-year average of 1.9.

However, its outlook for European equities is dimmer, with a neutral stance, as economic activity recovers slowly.

UBS noted: "Little to no economic growth in large parts of the euro zone has created a difficult environment for companies, whose earnings dynamics therefore lag those of other regions - especially Japan and the US."

alfoo@sph.com.sg

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