UBS’s global wealth management division sees gold outperforming more cyclical commodities in 2020, as political uncertainty and a likely weaker US dollar is expected to push gold prices higher.

In its ‘Year Ahead 2020’ report — outlook for the year — UBS sees gold appreciating in 2020, albeit at a slower pace than in 2019, when it was up 18 per cent in the year up to October.

Muted economic growth and now lower interest rates reduce the opportunity cost of holding gold, which does not offer a yield.

“Political uncertainty could send safe-haven flows into gold. And since gold is priced in USD, a weaker dollar would in turn push gold prices higher”, said the UBS report titled ‘Year of Choices’.

In contrast, ongoing economic concerns dampen the outlook for cyclical commodities. In the absence of a broader recovery in manufacturing and investment activity, the conditions are building toward market surpluses both in industrial metals and in oil, it added.

Weaker greenback

UBS expects the US dollar to weaken over the course of 2020.

In recent years, high interest rates, risk aversion stemming from the downturn in global trade, and support from earnings repatriation have supported the US dollar.

But over the coming years, US growth and interest rates will be closer to those elsewhere in the world, and uncertainty ahead of the US election and the waning effect of tariffs suggest a weaker greenback is likely, according to the UBS report.

We like the Rupee

The dollar’s exclusive position in recent years as a relatively high yielding currency with safe haven characteristics will be hard to replicate.

“In an uncertain environment, we think the Japanese yen and the Swiss franc will benefit from safe-haven flows”, the report noted. UBS sees the “hunt for yield” to likely benefit select emerging market currencies. “In particular, those countries enjoying rising GDP growth, investment, productivity and fiscal stimulus are likely to find their currencies in demand. Currently, we like the Indian rupee and Indonesian Rupiah,” the report said.

Equities

In 2020, UBS wants investors to prioritise both quality and dividends. It forecasts equity earnings to increase by about 5 per cent in the US in 2020 and 6 per cent in emerging markets, and to contract 3 per cent in the Eurozone.

In Asia, dividend yields are higher than their historical average, and UBS sees scope for dividend growth. “We like high dividend yielding stocks in markets where the dividend yield on stocks is higher than the yield on government bonds, particularly in Singapore, Hong Kong, Thailand and Taiwan.”

In a more protectionist world, companies that rely on domestic and consumer spending look more resilient than those exposed to foreign and business spending, UBS has said.

ESG factor

In emerging markets, UBS believes an attractive way to improve the quality of one’s equity portfolio is to invest in companies highly rated, according to environment, social and governance criteria (ESG Leaders).

Emerging markets face some major challenges in the coming years, which will put stress on resources like water, food and energy, and may result in increased environmental and social risks, the UBS report said.

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