In light of recent market volatility, UBS advises investors to focus on quality growth and prepare for potential lower interest rates.
The past week saw significant market fluctuations driven by the unwinding of yen carry trades and heightened recession fears in the US.
However, analysts suggest this may be an opportune moment for strategic adjustments.
The turmoil began with a "risk-off" sentiment that spurred a sell-off in risk assets, exacerbated by fears of a US recession. The volatility was compounded by concerns over US inflation data, which could either signal economic weakness or prompt the Federal Reserve to delay rate cuts.
UBS notes that while these fears have created market turbulence, "sentiment appeared to improve later in the week" following reassuring US jobs data.
UBS highlights the significant strengthening of the yen after the Bank of Japan's rate hike, which led to a sharp 12.4% drop in the Nikkei 225 index on August 5, its worst single-day decline since 1987. Despite this, the yen and Japanese equities have since stabilized.
UBS reports that "the bulk of yen carry trades have already been unwound," suggesting that remaining risks from this trade are likely contained.
Given these dynamics, UBS recommends that investors "seek quality growth," which has been driven by firms with competitive advantages and exposure to structural growth drivers.
Additionally, with inflation showing signs of control, UBS expects the Federal Reserve to "front-load rate cuts," aligning with a broader global trend toward lower rates.
Finally, UBS advises diversifying with alternatives, noting that hedge funds can provide stability and attractive returns amidst market fluctuations.