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Spotlight On Opportunities In Oil, Energy Stocks, Gold, Hedge Funds – UBS WM

Amanda Cheesley

4 March 2024

Investor sentiment can be fragile, especially as markets sit at record high levels when the outlook for the US economy remains uncertain, according to .

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.