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U.S. equities, high-yield European bonds attractive: UBS wealth arm

[June 09, 2016] By Tomo Uetake

TOKYO (Reuters) - U.S. equities are an attractive investment as economic momentum is picking up and some bearish factors such as a strong dollar and low oil prices are diminishing, a top fund manager of UBS's $2 trillion wealth arm, told Reuters.

Mark Haefele, Zurich-based global chief investment officer of UBS Wealth Management and UBS Wealth Management Americas, said investors should bear in mind the stronger basis now for higher interest rates in the world's largest economy.

UBS Wealth Management, the world's largest global wealth manager, expects the Federal Reserve to raise interest rates twice this year despite soft U.S. payrolls data released last week.

"I've been recently traveling around the world talking to clients and what strikes me is the level of concern is very high," Haefele said.

"They are concerned about central banks' policies and the global political environment. There are reasons to be concerned but I think the level of concern is a little too high."

Although U.S. corporate earnings dropped 6 percent year over year in the first quarter, two big reasons behind the fall - a strong dollar and low oil prices - are waning, Haefele said.

U.S. earnings are likely to grow 3 percent in 2016 and while share valuations are not cheap, they are near historical averages, he added.

Haefele, on a visit to Tokyo, said the Fed was likely to increase rates in September and December, and noted statistical and anecdotal evidence that wage pressures were rising.

"It's clear that the Fed wants to move. You see wage pressure in the United States in the statistics but we also have a lot of clients - one out of two billionaires in the world - with operating businesses," he said.

"They're confirming to us that they are seeing this wage pressure in their own private companies."

While some other share markets appear to be doing better, they prefer U.S. equities in terms of risk-adjusted returns, he said.

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Traders work on the floor of the New York Stock Exchange in New York, U.S., June 1, 2016. REUTERS/Lucas Jackson

Haefele said they are overweight European corporate bonds, high-yield in particular, because of earnings growth, GDP growth and central bank support.

"With the ECB purchasing corporate debt, we think that will help the credits all across the spectrum in Europe."

As for Brexit - the UK referendum on European Union membership on June 23 - Haefele said the dollar, and potentially Swiss franc and yen, could gain if Britons vote to leave the EU.

Large-cap UK stocks, with more of their earnings coming from outside the country, will probably do better than small-cap stocks, he added.

Haefele also said investors would need to move more towards illiquid assets - private debt, private equity and real estate - to boost returns in the current environment where a large part of European and Japanese bonds are yielding negative returns.

UBS Wealth Management and UBS Wealth Management Americas have combined 1,934 billion Swiss francs ($2.02 trillion) in assets under management as of March 31.

(Editing by Jacqueline Wong)

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