Volatility's Back, But UBS Urges Investors to Stick With Stocks

(Bloomberg) -- The return of volatility in the stock market this year doesn’t mean the good times are ending, but investors need to be savvy about their exposure to risk.

UBS Group AG is recommending that clients expand their sources of return and diversify their portfolios, adjust their exposure to the downside in the equity market and look for areas that avoid risky credit and excess foreign-exchange holdings, according to a note from the Swiss bank Thursday.

“The presence of heightened risk and normalized volatility does not mean that investing has become unattractive, or that investors should expect negative returns,” UBS strategists led by Global Chief Investment Officer Mark Haefele wrote. “Global growth is still good, earnings growth is strong, and equity market valuations remain appealing relative to cash and fixed income. In short, we think being invested in equities is quite likely to work in the short run, and very likely to in the long run.”

UBS sees a negative correlation between stocks and bonds lasting, but with periodic jumps. So the strategists recommend approaches that are less correlated to those two asset classes. They particularly like hedge funds, smart-beta portfolios and hedges that offset upside exposure with downside protection, such as buy-write options strategies.

In addition, due to the rise in volatility and changes in the global interest-rate environment, they also recommend sources of income that don’t involve high-risk debt or large foreign-exchange exposures.

“This is not a time to jump to cash,” the strategists wrote. “Through a range of strategies -- improving credit quality, adding downside protection, looking beyond familiar assets and traditional passive approaches, and investing with a longer-term mindset -- investors can prepare for the higher-volatility environment, while also positioning their portfolios for long-term growth.”

To contact the reporter on this story: Joanna Ossinger in New York at jossinger@bloomberg.net.

To contact the editors responsible for this story: Tracy Alloway at talloway@bloomberg.net, Eric J. Weiner, Jeremy Herron

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