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UBS Turns Bearish on Stocks, Recommends Gold Instead

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Aug. 27 2019, Published 10:50 a.m. ET

Investors should pay attention to what the big names on Wall Street see on the horizon. We’ll discuss what UBS is recommending.

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UBS turns bearish on stocks

On Monday, Bloomberg reported that UBS Global Wealth Management turned underweight on equities for the first time since the Eurozone crisis. UBS turned bearish on stocks due to the escalating trade war.

Reduce exposure to trade war and political uncertainty

Mark Haefele, UBS’s global chief investment officer, thinks that the risks to the global economy and markets have increased due to the US-China trade war. He recommends that clients reduce the risk in their portfolios. UBS reduced its own stock positioning relative to high-grade bonds. According to Haefele, the cut reduced the exposure to trade wars and political uncertainty.

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Increased risks for the economy and markets 

Haefele said, “Risks to the global economy and markets have increased, following a renewed escalation in U.S.-China trade tensions.” The last straw that turned Haefele bearish on stocks was the recent escalation in the trade war. On August 23, China imposed tariffs of $75 billion on US goods in two tranches. The tariffs didn’t go down well with President Trump. He tweeted that tariffs on $250 billion worth of Chinese products would increase from 25% to 30% on October 1. Also, the tariffs on $300 billion of Chinese goods, which should start on September 1, will be taxed at a higher rate of 15% instead of 10%.

Tariffs take a toll on US and global companies

President Trump’s higher tariffs and his order for US companies to look for an “alternative to China” roiled the markets. The Dow Jones Industrial Average Index (DIA), the S&P 500 (SPY), and the Nasdaq Composite fell 2.39%, 2.57%, and 3.16%, respectively. US semiconductor stocks were impacted the most. The VanEck Vectors Semiconductor ETF fell 4.14% due to Broadcom and NVIDIA’s losses of 5.4% and 5.3%, respectively.

China announced that it will reinstall higher duties on US autos, which took a toll on US auto stocks. On August 23, Tesla (TSLA), General Motors (GM), and Ford (F) fell 4.8%, 3.2%, and 3.0%, respectively. Read Ford, GM, Tesla Slump as US-China Trade War Escalates to learn more.

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New underweight position on emerging market stocks

Haefele’s changed position also includes a new underweight position on emerging market stocks. He thinks that they “are more exposed to heightened market volatility, a slowing global economy, and heightened trade tensions.”

At the same time,  Haefele advised clients “against large equity underweights.” He still thinks that the US can avoid a recession in 2020.

Other investment banks’ take on the slowdown

UBS isn’t the only major investment house turning bearish on stocks. In July, Morgan Stanley (MS) downgraded its stance on stocks from “equal-weight” to “underweight.” According to Morgan Stanley, the earnings have a higher potential to disappoint than markets’ estimates. Morgan Stanley is skeptical about SPY’s upside.

JPMorgan Chase (JPM) has also warned about a market crash in the third quarter.

Goldman Sachs (GS) pointed out that the trade war increases the risk of a recession.

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UBS is more positive on gold

Since UBS turned bearish on stocks, is there anything it’s still positive on? UBS has been recommending that clients buy gold since mid-May. However, as reported by Bloomberg in a note to clients on Monday, UBS increased its gold price forecast. UBS expects gold to hit $1,600 per ounce within the next three months. Notably, UBS thinks that the trade war has escalated to a new level. Giovanni Staunovo and Wayne Gordon, UBS analysts, said, “Gold has demonstrated its safe-haven qualities and we stay long the metal, a trade we initiated in mid-May.”

UBS increased its gold price forecast

UBS expects gold to reach $1,600 per ounce in the next six months and $1,650 per ounce in the next 12 months. Previously, UBS had an outlook of $1,500 per ounce for both of the periods.

However, UBS said, “The main risk to our call is a back flip by Trump or concessions and deescalation by China.”

Gold is one of the top-performing assets 

Investors should note that since the trade tensions started escalating in May, gold has been one of the top-performing assets. The SPDR Gold Shares, the largest gold-backed ETF, has returned 19.3% since the end of May. During the same period, the S&P 500 (SPY) has returned 2.8%. The more leveraged options to gold have seen impressive returns.

The VanEck Vectors Gold Miners ETF (GDX) has seen gains of 45.2%. GDX’s returns have been driven by Yamana Gold, Barrick Gold, and Kinross Gold with gains of 94.6%, 63.9%, and 55.5%, respectively. The Direxion Daily Junior Gold Miners Index Bull 3X Shares ETF and the Direxion Daily Gold Miners Index Bull 3X Shares ETF have seen triple-digit returns at 175.5% and 174.0%, respectively.

Jeffrey Gundlach is also positive on gold. He expects gold to rise to $1,600–$1,700 per ounce. Ray Dalio thinks that gold is the answer to end the era of lower rates. Paul Tudor Jones expects that gold could hit $1,700 soon after hitting $1,400 per ounce.

Read Trump, Trade War, Powell: More Upside for Gold Prices? to learn more about gold’s upside potential and its drivers.

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