After the dramatic 70-per-cent advance for the stock market over the past year, investors who are overweighted in equities should consider taking some of their money off the table, says UBS AG , the Swiss-based banking giant.
The call to take profits was issued in the bank's second-quarter outlook, which says the stock market is "past the sweet spot" where a combination of undervalued share prices, monetary stimulus and increasing growth gave stocks huge upside potential with little risk.
Shares are currently priced near their fair value based on earnings potential and dividends, while there is less of a safety margin for investors in case of unexpectedly weak economic data or profit misses.
"We think the evaluations at this stage are in a pretty tight range close to fair value," said Stephen Freedman, a global investment strategist with the bank in New York. "We recommend that investors take some risk off the table by moving back to a benchmark allocation to stocks."
Mr. Freedman has been making the bank's pitch for modest profit taking to high net worth UBS clients in Canada this week, coinciding with some choppy trading on North American markets.
Stocks rallied about 6 per cent in the first quarter, and UBS thinks the best they'll manage for the balance of the year is a return in the high single digits.
Among the world's stock markets, UBS favours those in emerging regions because valuations are "not expensive" and have "a lot of growth potential," he said.
Mr. Freedman doesn't believe investors should hoard the cash they're taking from stocks and says there is a compelling case for increased exposure to commodities. The firm recommends buying investments linked to a commodity index to try to capture the general upside from higher raw material prices, while avoiding the volatility often associated with bets on individual commodities.
While many Canadian companies offer resource exposure, Mr. Freedman said producers in emerging markets sport more attractive valuations, and can often be purchased at price-to-earnings multiples about 25 per cent below those prevailing domestically.
The view that commodities will rise is a reflection of the bank's projection of economic activity over the next year.
It says the most likely scenario, which it places at a 70-per-cent probability, is for a slow and steady recovery.
The chances of a strong economic rebound are low, at 15 per cent, as are the odds of having a double-dip recession, to which the bank gives a one-in-10 chance. It believes a return to 1970s style stagflation is even more remote, at 5 per cent.
Mr. Freedman said troubles in Greece bolster the case for subdued growth. He said governments over the next five years are going to implement austerity measures, leading to a prolonged period of constrained economic activity.