Dubai: The year 2023 was historic for those in the Financial industry. From Bond yields reaching their highest levels in more than 15 years to the world’s first trillion-dollar AI company, the global economy confounded expectations. However, as we move beyond the COVID-19 pandemic, UBS’s Year Ahead 2024 report indicates that manoeuvring through economic challenges such as re-emerging inflationary pressures, labour market strains, rising interest rates and government indebtedness still affects the whole world.
Nevertheless, here is what businesses and investors should put their money into to get ahead next year.
Managing liquidity
According to the latest report, UBS believes investors should limit total cash balances to optimize yields in the coming year. However, war and geopolitical uncertainty could elevate the perceived safety of cash. On the other hand, the bank expects reduced interest rates in 2024, diminishing returns on cash and increasing reinvestment risk. Over the next five years, investors can cover expected portfolio withdrawals using fixed-term deposits, structured solutions, and bond ladders.
Fixed term deposits
UBS recommends investing in fixed-term deposits to lock in current high yields on cash reserves and provide coverage for prospective needs or liabilities within one year. Those worried about issuer or counterparty risks can diversify their deposits around different banks.
Investors can capitalize on currently favourable yields on their cash holdings by utilizing fixed-term deposits. This strategy is well-suited for covering potential expenses and liabilities expected to arise within the next 12 months. Investors concerned about issuer and counterparty risks can diversify their deposits. Investing in fixed-term deposits of different maturities can also help match liabilities and reduce interest rate and reinvestment risks.
Bond ladders
Bond ladders offer investors a mechanism to enhance the certainty of their future returns. A bond ladder involves buying a series of individual short-duration bonds of varying maturities, staggered to provide a steady income stream and aligned with the size and timing of expected portfolio withdrawals over the next 12–36 months. UBS views current yields on short-duration bonds as attractive and anticipates that these yields may not persist if central banks decide to lower interest rates. Holding quality bonds may also offer scope for gains in downside economic scenarios.
Structured solutions
Investors seeking to balance potential losses with participation in equity market gains may consider structured solutions incorporating capital preservation features. Lower bond prices and lower equity market volatility in 2023 have improved the pricing of such strategies, which should mainly be focused on covering longer-term liabilities since costs may apply if investors need to sell before maturity.
Buying quality
The Zurich-based bank expects positive returns for equities and bonds in the year ahead. However, we believe investors should focus on quality within each asset class. In fixed income, quality bonds offer attractive yields and should deliver capital appreciation if interest rate expectations decline, as we expect. In equities, quality companies with solid balance sheets and high profitability, including those in the technology sector, appear best positioned to generate earnings in an environment of weaker growth.
“We think this is an opportune time to add to high-quality bonds— specifically high grade (government) and investment grade,” UBS said in a report. “Current yields provide attractive returns, with positive returns possible across a range of scenarios, and particularly in downside economic scenarios.”
In terms of stocks, quality stocks have historically outperformed in the late stages of the business cycle, including in periods of economic contraction, which should offer portfolio protection if the economy slows more than we expect. The quality tilt also aligns with our preference for US technology companies, which should be among the key beneficiaries of AI-related demand for hardware and software.
Currencies and commodities
As we enter 2024, UBS expects the US dollar to be stable around current levels. But as the year progresses, USD weakness may emerge, which makes selling USD upside for a yield pickup attractive. In commodities, investors can position for potential carry returns while hedging against geopolitical or weather risks.
Entering 2024, UBS anticipates that the US dollar will remain relatively stable around current levels. However, as the year progresses, a potential weakening of the USD could materialize, making selling USD upside for a yield pickup an attractive strategy.
In its outlook for commodities, UBS expects the broad commodity indexes to deliver low-teens percentage returns over the next 12 months. “We think this strategy provides an attractive risk-reward trade-off to investors who continue to hold their positions while also providing some protection against geopolitical and weather risks that threaten supply,” the bank said.
In the energy sector, UBS anticipates that Brent crude oil prices will fluctuate within a range of $90-100/bbl, with risks skewed to the upside due to the potential for oil supply disruptions.
If potential US rate cuts materialize, UBS expects gold to ascend to a record $2,150/oz by the end of 2024. However, in the short term, the opportunity costs of holding gold remain elevated, prompting the bank to favour buying on dips.
