Tags: ubs | stock | bubble | fears

UBS Doesn't See 'Dangerous Bubble' Despite Some Risks

Wednesday, 27 Nov 2013 08:36 AM

By Michael Kling

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If you're worried about a stock-market bubble, fear not, advises UBS.

"While there are some concerns, ultimately, long-term investors should only care whether sentiment has pushed valuations beyond reasonable levels," Alexander Friedman, global chief investment officer for UBS wealth management, wrote in a note, according to CNBC.

"In short, it has not: investors need not fear that we are in the midst of a dangerous bubble in risk assets."

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Despite concerns of high valuations, investors should look for earnings growth to drive stocks, he says.

The bad news, if you can call it that, is that annual returns in the 7 percent to 8 percent range next year as opposed to the 15 percent or more returns in recent years, UBS predicts

"Global growth," Friedman states, "is expected to be higher in 2014 than 2013 — the first annual acceleration since 2010 — which we expect to provide support for global equities."

U.S. company earnings are expected to grow by 8 percent in 2014, driven by solid domestic demand.

In the eurozone, earnings are showing tentative signs of a turnaround and UBS expects them to grow at a low double-digit rate in 2014, supported by improving economic growth and expansionary monetary policy, UBS said.

Following its own advice, UBS is overweight in U.S. and European equities. It's underweighting Japanese equities. "We expect Japanese equities to perform broadly in line with global equities, and believe that playing Japan via an underweight in the yen offers a better risk return," Friedman says.

Others warn that valuations are becoming stretched, even if a crash is not impending and the market is nothing like the 1999 dot-com bubble.

"It is not a bubble, but it is starting to look overdone. Bubbles to me represent what you had in 2000," said Russ Koesterich, chief investment strategist for BlackRock, according to the San Francisco Chronicle.

The S&P 500 has a price-to-earnings ratio of 17.6 based on operating earnings for the past 12 months, which indicate stocks are not overvalued. The ratio was 13 and the end of 2011 and 18 at the end of 1999. The long-term average since 1988 is 18.6.

However, Dan Wiener, CEO at Adviser Investments, told the Chronicle a correction may be coming.

"We have run up very far, very fast on an economy that is growing about 1.5 percent on a year-over-year basis. There are pockets where valuations are very high relative to intrinsic value," he said, saying small caps are especially overvalued.

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