In its latest monthly letter, the editorial team from financial services firm UBS discuss the key opportunities for investors as inflation falls, AI investment booms, and the global equity rally broadens.
Sometimes it can be all too easy to get lost in the details and miss some of the big trends that are impacting markets:
Inflation is falling and interest rates are already being cut in some countries
AI-related capital investment is booming
The equity market rally has broadened globally
The US election is approaching, and both the result and potential implications are uncertain
Alternative investments continue to form a significant part of portfolios providing an additional source of diversification and returns. In the medium term, family offices are most concerned about the danger of a major geopolitical conflict, climate change and high debt levels.
What do they mean for investors?
According to UBS, lower inflation and lower interest rates should support stocks and bonds. Higher interest rates have led many investors to hold more cash or money market investments than usual.
"Lower interest rates will likely lead at least some of that money to a new home. Fixed income is a natural destination, while carry strategies using currencies are likely to rise in appeal. We also expect stocks to benefit, especially if the US economy achieves the soft landing we envision, it said.
UBS said that increasing investment in artificial intelligence capabilities by technology firms will contribute to significant profit growth in the “enabling layer” of the AI value chain—notably in the semiconductor industry.
"Eventually, artificial intelligence should lead to value creation across a broad range of industries and applications. For now, we see “AI enablers” as the most tangible and profitable opportunity for investors."
UBS said the broadening of the equity market rally—both in terms of earnings and performance—should widen the opportunity set for investors looking to diversify sources of return beyond technology.
"Investors need to be cognisant of the potential for political and geopolitical risks to drive volatility and impact markets as the year progresses," it said.
How to position?
Fixed income remains the preferred asset class of UBS.
"In equities, we see modest upside overall, and focus on capital preservation strategies and selectivity. In technology, positioning for upside via options or structures can be an effective way to manage sentiment, valuation, and idiosyncratic risks."
"At an index level, such strategies can also help investors mitigate potential policy and geopolitical risks. Looking beyond tech, we like exposure to some more lowly valued parts of the equity universe, including the UK market and US small-caps."
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