UBS chief strategist: Market is not in a ‘bubble’, but US debt poses the real risk
Despite narrow market leadership that mirrors the crashes of the 1970s and 1990s, the equity market is not currently in a ‘bubble,’ according to UBS Investment Bank Chief Strategist Bhanu Baweja.
Speaking at Abu Dhabi Finance Week, Baweja addressed investor concerns that just nine companies in the Russell 3000 have driven 72 per cent of recent market gains.
While he acknowledged this concentration is reminiscent of past bubbles, he argued that the underlying fundamentals are far stronger today.
Companies driving the current gains boast ‘considerably better’ margins and net debt than the market leaders of previous eras, he noted.
Instead, Baweja warned that the unprecedented acceleration of US debt could be the actual catalyst for future volatility.
Underlying risks bubble
Bhanu Baweja told the audience that a UBS ‘similarity analysis’ concluded that the current market resembles the environment of March 1998, suggesting there is still hope.
However, he added that the macroeconomic environment today is considered “much worse” than in the 1990s, citing low US consumer sentiment, noting that “today’s consumers are especially pessimistic about future job opportunities”.
He also highlighted that the US tariffs remain a potential threat to the US economy, citing higher inflation and potential consumer price increases.
“The tariffs could still hurt the US economy through higher inflation. So far, these tariffs have all been absorbed by the margins of US companies… but this is likely to be passed on to consumers, so more and more companies, like Walmart, are likely to start pushing prices higher,” he explained.
He also warned that US government debt is about to grow at an unprecedented rate, doubling in the coming decade after growing to $27tn over more than 200 years.
“Between 1789 and today, roughly 235 years, [the US] have issued $27tn in debt in today’s money. In the next 10 years, [the US] will issue the next $27tn.”
He told the room that this will have a significant impact on markets, as the “huge supply” of new US Treasury bonds could erode the traditional “risk-free” status of Treasuries.
‘Gold trade may be near its peak’
Baweja also said talk of the US dollar’s demise is premature and the US currency will likely hold up despite widespread market fears.
The strategist suggested economic uncertainty in China and Europe would drive investors towards the US.
He explained: “If trend growth in these regions picked up, then investors are very happy to move to the rest of the world and as a consequence…the dollar depreciates.” But he added that “we do not believe that trend growth in Europe or China is picking up…that’s why we’re looking for a pretty flat dollar.”
However, on the topic of gold, Baweja added: “[we have] outlived our welcome”.
Gold started the year at $2,669 and has since soared to over $4,200, a jump of over 45 per cent amid political jitters.
He stated that UBS believes gold is heading towards $4500-$4750 in the next 6-12 months; however, while Baweja acknowledges gains are expected, he also warned that the trade may be near its peak.
“We could be outliving our welcome. We should be making an elegant exit, but we are still breathing for more gains, and we think precious metals, gold and silver, can do quite well,” he stated.