Brace for a volatile year, UBS chair Axel Weber tells investors

UBS global chairman Axel Weber has warned investors to “buckle up” for a volatile and difficult year.

UBS global chairman Axel Weber has warned investors to “buckle up” for a volatile and difficult year, laced with growing international currency tensions and diverging central bank policies.

Addressing UBS’s annual China conference where investors managing more than $US10 trillion in assets are in attendance, Mr Weber – a former president of the German Bundesbank – predicted the European Central Bank would unveil a “targeted” quantitative easing stimulus program at its meeting on January 22.

He also tipped the US Federal Reserve to begin raising interest rates in the middle of the year by 25 basis points, but said market expectations for a rapid “decoupling” away from policy in Europe and Japan was unlikely.

He said the chances of a second rate hike this year in the US would be “very data dependent”, with the halving of the oil prices in the past 12 months giving the Fed “optionality” to keep policy accommodative.

Along with the oil price, Mr Weber cited the rising US dollar as another major risk for economies dependent on dollar funding.

“I think what is most likely to happen is we will see…movements in some of the major exchange rates and that always has been coupled with increasing volatility with a high amount of uncertainty,” he said at the conference in Shanghai.

“So for me it’s very likely that current trends (on rates) as priced in are unlikely to materialise.

“I see a relatively high probability of some risks materialising this year…negative things happening in financial markets and when I talk about heightened uncertainty I usually mean there’s a big risk that even very bad things could happen in the market.

“So there’s a number of issues out there that I would recommend to investors to really buckle up and fasten safety belts.

“This is going to be a volatile year plagued with uncertainty and elevated fluctuations in volatility and foreign exchange markets impacting on the real economy. So it’s going to be a difficult year ahead.”

After last year ending its “quantitative easing” program of bond buying, the US Fed’s first interest rate hike from zero is shaping as one of the biggest events for a range of asset classes this year, including stocks, bonds and currencies.

Athanasios Orphanides, a former member of the governing council of the ECB and ex-advisor at the Fed, agreed lower oil prices and ongoing weak growth in Europe would allow the US central bank to raise rates more “smoothly” than previously expected.

He added the ECB will likely go the opposite way to the US and start expanding its balance sheet through its own QE program at its January 22 meeting, but the risk was that it was not large enough.

Mr Weber said the likelihood of QE in Europe had been largely “priced in” by markets and the bigger issue was economies undertaking structural reforms that had long been put off.

But he said Greece would ultimately stay in the euro and predicted the ECB’s QE program would focus on buying corporate debt and covered bonds, plus incentivising countries to reform.

“It will be more targeted, it will have some conditionality attached to it,” he said.

“Rankings of sovereigns will play a role in the size and they will try and allocate the biggest purchases to the higher rated sovereigns, so they put pressure on sovereigns to improve their government ratings through appropriate reforms.”

With China’s growth tipped to slow below 7 per cent this year, it was also diverging from the US, an “outlier” economy that is one of the few in the developed world experiencing strong growth.

But the US dollar bull market would raise global tensions, causing a “differential impact on commodity and oil dependent countries relative to those that are importers”, said Mr Weber.

“I see many of the G20 discussions in the future…will focus on exchange rates and spillover effects of currency policy and therefore I don’t think it will be quite as benign going forward and there will be more tensions internationally,” he said.

Chi-Won Yoon, UBS’s Asia Pacific CEO, said it was not surprising China was slowing after three decades of double digit growth and that there remained “palpable” optimism.

“We talk about slowing growth but the growth rate is still remarkable by any measure. There is greater currency stability than most countries in the region and most of all, there is enormous reform potential and commitment to reform,” he said.

The reporter travelled to Shanghai courtesy of UBS.