UBS sees 2 Fed hikes, Asian central banks to pause in 2019

By BLOOMBERG

SINGAPORE • UBS Global Wealth Management predicts the US Federal Reserve (Fed) will raise interest rates twice this year despite markets pricing in little chance of that happening.

An expanding US economy and low recession risk may provide opportunities for the Fed to keep ratcheting up borrowing costs, said Min Lan Tan, head of the CIO for Asia Pacific in Singapore.

Still, that’s unlikely to spur many Asian central banks to adopt a similar pace of tightening, after policymakers from Indonesia to India boosted rates last year to combat routs sparked by four Fed hikes, rising US Treasury yields and a stronger dollar.

“Global inflation will remain low enough for policy tightening to remain gradual, so the Fed could hike twice,” Tan said at a conference yesterday.

“And in this context, actually, most of Asia policy tightening is done — in fact, China is in easing mode.”

UBS isn’t the only firm to say markets may be too aggressive in dismissing the likelihood of any hikes from the Fed this year. JPMorgan Chase & Co and Bank of America Corp still see two increases, while Loomis Sayles & Co said the US central bank may tighten monetary policy once.

Although the median projection of Fed officials is for two quarter-point increases in 2019, fed fund futures currently don’t even price in one. Fed chairman Jerome Powell signalled last week the US central bank can be patient before adjusting rates again as it waits to see how global risks impact the domestic economy.

While monetary policy may have stabilised in Asia, UBS still sees “key uncertainties” brewing in the region — regional elections and the US-China trade war to name a few, Tan said.

“Our base case is that sufficient progress will be made to delay further tariff escalation, but substantive issues will remain,” she said.

Here are UBS’s investment views for 2019:

• Unlikely China will massively depreciate the yuan, sell US Treasuries or overtly punish US companies operating there as the nation needs to maintain stability and attract foreign direct investment.
• Yuan will stay close to seven per dollar if the US-China trade truce is sustained, or it may weaken beyond seven if there’s any worsening relations.
• Overweight Asian equities, which are forecast to return 12% to 15% in 2019,
with a preference for stocks in China, Singapore, Korea and Indonesia.
• Dollar strength will fade, providing a more supportive environment for Asian risk assets.
• Likes Asian high-yield credit,which is predicted to return 5% to 6% this year.
• Asian currencies may weaken in first quarter before ending 2019 where they are today.
• Short Korean won against the dollar to hedge against overweight position in Asia equities, slowing exports in the region.
• Best defence for Asian investors against potential market shocks this year is to reduce home bias and hold a diversified global portfolio.