UBS Asset Management Sees Equity Bull Market Withstanding Higher Rates

UBS Asset Management remains constructive on global equities, arguing that a foundation of resilient economic growth and broadening corporate earnings can support further gains even as the Federal Reserve maintains a hawkish stance.

In its latest global multi-asset outlook, the firm noted a growing divergence between strong risk assets and challenged bond markets, as investors balance economic momentum against the prospect of higher-for-longer U.S. interest rates.

Economic Strength to Buoy Stocks

UBS bases its positive equity outlook on several key economic indicators. The firm highlighted an improving U.S. labor market and accelerating global manufacturing activity as primary drivers underpinning the global economy.

While lower oil prices may help ease headline inflation, UBS expects underlying U.S. core inflation to remain elevated. This persistence, the firm stated, keeps the possibility of further Federal Reserve interest rate hikes on the table, creating potential volatility.

Regional and Sector Preferences

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According to Evan Brown, Head of Global Multi-Asset Strategy for the Americas and Asia at UBS Asset Management, the firm's strategy reflects this outlook. Key positions include:

• An overweight position in equities.
• A preference for emerging markets and Japan, where leading indicators suggest the strongest earnings growth.
• Continued exposure to AI-linked stocks due to "surging earnings growth," but with an emphasis on diversification to manage risks from crowded positioning and leveraged single-stock ETFs.

Cautious Stance on Bonds and Currencies

In fixed income, UBS Asset Management is cautious on U.S. Treasuries, expecting them to underperform equities as markets price in additional Fed rate hikes. The firm sees better opportunities in UK and Australian government bonds, where economic growth is showing signs of slowing.

Reflecting the Fed's hawkish policy relative to other central banks, UBS also expects the U.S. dollar to remain strong. The firm argues that other major central banks are more likely to slow their tightening cycles amid weaker growth.