Investment strategy for high inflation and rising interest rates: UBS GWM

  • The latest inflation data clearly shows that more interest rate hikes are on the way.
  • UBS Global Wealth Management explains what investors should do when rates rise and the economy slows.
  • CIO Mark Haefele’s advice covers currencies and alternative strategies as well as equities.

And the hikes follow one another.

After the government announced a new 40-year year-on-year inflation record, investors are even more confident that the Federal Reserve will implement another 75 basis point hike in November and start again in December. They are relatively confident that rates will also rise at least a little more in early 2023.

For at least a little while, nothing will deter the Fed, according to Mark Haefele, chief investment officer of UBS Global Wealth Management. UBS is the world’s largest asset manager and was responsible for $3.9 trillion in assets as of the middle of this year.

“We expect markets to remain volatile in the months ahead, and we maintain our tilt toward value and defensives,” Haefele wrote in a note to clients.

This volatility showed on Thursday as markets initially fell after the latest inflation report. But then they staged a strong rally as investors found positives, including the fact that the pace of consumer price increases was a little slower in September than in August. US markets were also coming off a six-day losing streak.

But Haefele says market participants should expect more upside no matter what. With the job market looking solid, the Fed won’t change course immediately even though it sees some signs of slowing inflation lately.

This is part of the basis of its multi-asset approach. As stock and bond markets both suffer and are both driven by inflation data and central bank behavior, Haefele points out that options such as hedge funds and private investments are good choices for investors. qualified investors at this stage.

Meanwhile, he says rising interest rates are making American dollars and Swiss franc smart choices for currency investors. His recommendations for the stock market are cautious, reflecting an environment where investors fear losing their shirts.

“We are tilting our preferences towards more defensive areas of each asset class, including consumer staples and healthcare stocks, and high-quality bonds,” he wrote. “We like too global value stocksthe energy sector — which should be supported by higher oil prices in the coming quarters — and the UK value-oriented market.”

Energy stocks have jumped 45% this year due to soaring commodity prices such as oil. Consumer Staples and Healthcare are respectively the second and third best performers among the 11 major stock sectors this year. The consumer staples sector is down 12% and healthcare stocks fell 13.5%, according to Fidelity.

No investor wants to see double-digit losses, but these results look pretty good compared to the 25% loss the benchmark S&P 500 has suffered this year.

Haefele says the MSCI Global Value Index has done much better than its growth stock counterpart in the first three quarters of this year, and he says that will continue.

What does the rest of Wall Street think?

Louis Navellier, a 35-year veteran of growth investing, agreed the odds of another big rally in December had increased, but said the market should rise from here.

“The market typically takes off within 90 days of the yield curve inversion. This means the October rally was real,” he wrote recently, referring to the inversion that began in July. . “We expect energy stocks to continue to be a silver lining, a critical path that all investors can follow.”

Bank of America’s team of US economists and Jefferies chief economist Aneta Markowska both said rates would rise significantly, with Markowska calling for a “terminal rate” of 5.1%, above from the 4.75% to 5% range expected by most investors.

But Comerica chief economist Bill Adams is one of the few who thinks the Fed will start to slow things down after that November rate hike.

“Rate setting committee members believe it is appropriate to slow rate hikes as interest rates become restrictive, i.e. high enough to slow overall economic activity,” he wrote, adding that the drop in home sales clearly shows that rates are slowing the economy.

“As such, the Fed is likely to deliver another large rate hike in its November decision and then slow the pace of the hikes early next year,” he said. “Comerica expects the current rate hike cycle to end with the federal funds rate at a level of 4.50% to 4.75%, and to maintain it there at least until the fall of 2023.”


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