As the global economy experiences slowing growth and inflation, central banks are beginning to reduce interest rates. The Swiss National Bank (SNB) led this trend, followed by Sweden’s Riksbank, the Bank of Canada and the European Central Bank. In this environment, keeping a long-term core allocation to a mix of equities, bonds and alternatives can help investors position themselves for uncertainty.
The UBS Chief Investment Office GWM Investment Research suggests moving cash and money market holdings into high-quality corporate and government bonds, anticipating price appreciation as markets brace for a deeper rate-cutting cycle. The Zurich-headquartered bank predicts
Effective liquidity management
UBS highlights that the current returns on cash will diminish if central banks continue their rate cuts. Investors holding cash, money market funds, or those with expiring fixed-term deposits should manage their liquidity proactively. “For expected cash requirements over the next one to three years, we think bond ladder strategies can help investors retain attractive yields,” the report read. For cash currently earmarked for longer-term spending needs, investors should consider structured investment strategies that provide exposure to market gains alongside a degree of capital preservation.
“Investors holding cash, money market funds, or those with expiring fixed-term deposits should manage their liquidity proactively”
Investing in quality bonds
The multinational investment bank advises deploying cash into high-quality corporate and government bonds, which offer attractive yields and potential capital appreciation if deeper rate cuts are priced in. This also applies to sustainable investments in green, social and sustainable bonds and those issued by multilateral development banks.
“We prefer medium-duration bonds with a maturity of up to 10 years, as we think concerns about the high US debt burden and loose fiscal policy may pose a risk for longer-duration bonds,” the bank said in the report. “In our base case, we see the 10-year US Treasury yield falling to 3.85% by the end of this year, from around 4.2% at the time of writing.”
Diversified fixed-income strategies
A combination of lower interest rates and positive economic growth should support diversified fixed-income strategies. Complementing core quality bond holdings with exposure to riskier credits, such as emerging market bonds, can enhance overall portfolio yields. Given tight spreads and potential idiosyncratic risks, selectivity and diversification are crucial.
“Active approaches may offer higher potential returns thanks to their ability to take risk-controlled exposure to higher-yielding parts of the fixed income market, which may be harder for individual investors to achieve,” UBS noted.
Equity investments
The Swiss bank identifies opportunities in EMU small—and mid-cap stocks, EMU consumer stocks (including parts of the luxury sector), the UK market and select US housing stocks, which are likely to benefit from lower interest rates.
Currency and commodities
While the US dollar may remain strong in the near term, UBS expects it to weaken over the medium term as US interest rates decline and concerns about the US fiscal deficit grow. Therefore, selling dollar rallies is recommended. With the SNB unlikely to make further significant rate cuts, the Swiss franc is expected to appreciate. Additionally, UBS sees potential in a broad range of commodities, including oil, copper, gold and silver.
“A combination of lower interest rates and positive economic growth should support diversified fixed-income strategies”
Strategy for selling dollar rallies
The dollar index has risen nearly 4% year-to-date, driven by robust US economic data and interest rate cuts in other economies. However, UBS advises using periods of dollar strength to reduce exposure or engage in volatility selling strategies to generate income, anticipating likely Fed rate cuts later this year.
The US dollar is not cheap—it stands at levels comparable to the mid-1980s and the early 2000s in real trade-weighted terms. The Swiss bank thinks that depreciation pressures could mount if markets start to price a deeper Fed rate-cutting cycle. Fears about the size of the US fiscal deficit may also contribute to a weaker greenback over the longer term.
Commodities investment prospects
UBS forecasts Brent crude oil prices to reach around $87 per barrel by year-end, supported by solid demand and OPEC+ efforts to balance the market. For risk-tolerant investors, selling downside price risks in Brent could be profitable.
The copper market is expected to remain in a deficit, with prices forecasted to rise to $11,500 per metric ton by year-end from the current $9,786 per metric ton. UBS also sees upside potential for gold and silver prices, predicting gold to reach $2,600 per ounce by year-end and $2,700 per ounce by mid-2025, up from $2,330 per ounce today.
Central banks have recently increased their gold purchases to diversify reserve holdings. Ahead of the US election, gold is seen as an effective hedge against geopolitical polarisation, the US deficit and higher inflation. Silver prices are expected to rise to $38 per ounce by mid-2025, driven by industrial demand from the renewables and electronics sectors. Investors can gain indirect exposure to these opportunities through select mining stocks.