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UBS Global Wealth Management discusses how investor sentiment is susceptible to a range of economic and market risks as equities remain at record high levels, and outlines how to hedge against market risks. A fellow Swiss bank, UBP, holds similar views.
Investor sentiment can be fragile, especially as markets sit at
record high levels when the outlook for the US economy remains
uncertain, according to UBS
Global Wealth Management.
Data published last week shows that US consumer confidence
in February fell for the first time in four months, with concerns
over the economy and the US presidential election overshadowing
their outlook.
Inflation remains at the forefront of consumers’ minds, UBS
added. While the average inflation rate expectation over the next
12 months continues to ease, and now stands at the lowest level
since 2020, overall inflation remains the main preoccupation of
US consumers, UBS said.
The stronger-than-expected consumer price index (CPI) for January
has caused markets to scale back the expected pace and scale of
the US Federal Reserve’s rate cuts this year, and the upcoming
release of personal consumption expenditure (PCE) offers another
glimpse of the health of the US economy. While UBS continues to
expect inflation to recede over the course of 2024, another
strong reading in the US Federal Reserve’s preferred gauge of
inflation is likely to trigger further volatility.
UBS is not alone in its views. Union Bancaire Privée (UBP) also
highlighted how concerns over inflation persist, but remains
optimistic regarding avoiding recession. With inflation tracking
at around 3 per cent, the US Federal Reserve faces pressure to
address rising prices while considering potential rate cuts to
stimulate the economy, UBP said. UBS”s base case remains that the
Fed will begin to cut rates in June, with 75 basis points of
total easing by the end of this year.
The US presidential race is also adding to anxiety, UBS said. The
Conference Board statement points out that US consumers are now a
bit less concerned about food and gas prices, but there are
growing uncertainties over the US political environment with the
presidential election later this year.
With former US president Donald Trump staying in the lead in
Republican primaries, UBS believes that media coverage on the
campaigns and potential policies could also affect market
sentiment in the lead up to November.
Altitude sickness?
All-time highs often generate investor concerns. UBS’s analysis
has shown that worries that markets have peaked after
all-time highs are not typically warranted. Over the past 60
years, average S&P 500 returns in the year following a record
high were no different from the one-year returns from other
periods. In fact, average returns for the three-year periods
after a new all-time high were slightly higher than entering the
market at other points, UBS said.
However, UBS believes that further exposure after such a large
rally can also be psychologically challenging for investors, and
market reaction to negative headlines may be greater than it is
to positive catalysts.
Against this backdrop, Mark Haefele, chief investment officer at
UBS Global Wealth Management, thinks one important action
investors can take is to hedge market risks. “In fact, a mix of
low equity market volatility and high bond yields makes this an
attractive time to consider strategies that allow investors to
capture market upside while protecting against downside,” Haefele
said. Hedge funds can increase portfolio stability and
diversification. He sees opportunities in capital preservation
strategies, oil and energy stocks, gold, and hedge funds.
UBS continues to think that slower growth favours quality
bonds and equities. “We also see opportunities in small caps and
emerging market equities, as they should benefit from lower rates
this year,” UBS said.