Top investment ideas

How to invest and plan ahead

How to invest

Position for lower rates

13 Dec 2024

We expect central banks to cut interest rates further in the year ahead, reducing cash returns. We believe investment grade bonds offer attractive yields and expect mid-single-digit returns in US dollar terms. Diversified fixed income strategies and equity income strategies can also help investors sustain portfolio income.

More to go in stocks

13 Dec 2024

We expect the S&P 500 to reach 6,600 by the end of 2025, around 8% higher than current levels. Tariff proposals should continue to contribute to volatility for European and Chinese markets, but we see value in maintaining diversified exposure to Asia ex-Japan. In Europe, we like EMU small- and mid-cap stocks and Swiss high-quality dividends.

Transformational innovation opportunities

13 Dec 2024

We expect significant and sustained profit growth in the transformational innovation opportunities of (1) Artificial intelligence and (2) Power and resources. By investing in these areas, we believe investors can earn strong long-term returns.

Sell further dollar strength

13 Dec 2024

While the US dollar may stay well bid in the near term, we believe its current valuation is stretched. We recommend investors use periods of further strength to reduce US dollar exposure through strategies such as hedging dollar assets, switching USD cash and fixed income exposure to other currencies, and utilizing options.

Moving light streaks in front of New York City skyline

Go for gold

13 Dec 2024

We expect gold to build on its gains in 2025. Lower interest rates, persistent geopolitical risks, and strong dollar-diversification trends likely see investor and central bank buying continue. Outside gold, we also see long-term opportunities in copper and other transition metals, with demand increasing alongside higher investment into power generation, storage, and electric transport.

Time for real estate

13 Dec 2024

We think the outlook for global residential and commercial real estate investments is bright. With declining and constrained supply paired with rising demand, we see opportunities in sectors including logistics, data centers, and multifamily housing. Investors should focus on strategic acquisitions and diversification to capitalize on these favorable market dynamics.

How to plan ahead

Developing a strategic plan that links goals with strategies can improve investors’ chance of success and help them stay focused on the bigger picture amid potential market turbulence.

Review your plan

Our Liquidity. Longevity. Legacy.* approach can help investors pursue wealth goals over different time frames:

Liquidity: We recommend holding sufficient funds to cover the next three to five years’ worth of short-term expenses, liabilities, and spending plans in a Liquidity strategy mainly using cash and short-term bonds. This can offer peace of mind during market volatility, and a disciplined process of drawing on, and refilling, the strategy during bear markets can help generate performance over time.
Longevity: Funds needed to meet financial goals throughout an investor’s life should be in a Longevity strategy. We believe this is best invested in a well-diversified global portfolio, with the objective of balancing long-term returns with diversification to reduce volatility and manage withdrawal risks.
Legacy: Excess funds beyond Liquidity and Longevity needs can be in a Legacy strategy, focusing on goals beyond an investor’s lifetime, like bequests or philanthropy. With immediate needs covered, this strategy can focus on aiming to maximize growth through equity or illiquid strategies or impact investing. Effective legacy planning can help maximize wealth transfers, impact, and supports philanthropy.

The infographic illustrates financial planning through three circles labeled "Liquidity," "Longevity," and "Legacy." The "Liquidity" section focuses on cash flow for short-term expenses over the next 3-5 years. The "Longevity" section addresses financial needs spanning from 5 years to a lifetime, emphasizing long-term planning. The "Legacy" section considers financial needs that extend beyond one's lifetime, highlighting the importance of planning for future generations. This diagram underscores the necessity of balancing immediate liquidity with long-term financial strategies and legacy considerations.

*Time frames may vary. Strategies are subject to individual client goals, objectives and suitability. This approach is not a promise or guarantee that wealth, or any financial results, can or will be achieved.

Put cash to work and secure durable income

Cash’s long-term underperformance compared to other asset classes is a structural phenomenon. Stocks have beaten cash in 86% and 100% of all 10- and 20-year holding periods, respectively, and by more than 200x overall since 1926.

The imperative to put cash to work is likely to grow in 2025: With interest rates likely to fall further, investors will earn progressively lower returns and will need to find alternative, more durable sources of income.

Switching cash into high-quality fixed income can lock in yields and help dampen portfolio volatility.

Deploying excess cash into equity income or balanced strategies can provide a more long-lasting source of return and increase the likelihood of beating inflation over the long term.

Annuities should also be considered, as they can play an important role in providing greater stability and predictability to income streams.

The infographics shows total returns on cash, stocks, bonds, and a 60/40 balanced portfolio from 1960 to 2024 in USD, using a log scale. Stocks outperformed significantly, followed by the 60/40 portfolio and bonds, while cash lagged behind, highlighting the long-term advantage of investing in stocks and bonds. Source: This data is sourced from Morningstardirect, UBS, as of November 2024.

Strengthen your core

Investors can build an effective portfolio with a variety of individual investments. But there is a risk that portfolio complexity can lead investors to lose sight of their overarching goals, particularly when markets become more volatile or when financial news headlines seem pressing.

To tackle this, we believe that investors should implement a “core” component in their wealth management strategy. The core should be a portfolio diversified effectively across asset classes, geographies, and sectors, and left alone to grow wealth consistently for the long term.

Establishing such a core and letting it deliver compounded returns over time can provide investors with the confidence that their financial goals are accounted for while freeing up time and mental energy to pursue other passions or to seek tactical satellite opportunities.

The illustration shows a doughnut chart wih three elements (stocks in burgundy, 60/40 portfolio in grey and bonds in mustard yellow), with the description "Core" in the middle. Different so-called 'satellite' investments, represented by icons, rotate around the core. The illustration, sourced by UBS, suggests that an investor's optimal approach consists in supplementing a core investment positioning with satellite investments to seize attractive opportunities.

Diversify with alternatives

By including an allocation to private equity, private debt, private infrastructure, and/or private real estate into portfolios, investors can diversify sources of return and potentially enhance portfolio growth. We believe that investors can consider replacing around 30% of their public equity exposure with private markets, depending on their tolerance for illiquidity.

In private markets, we like private credit, value-oriented buyout, and secondaries including infrastructure; and thematically, we favor software, health, and climate.

Meanwhile, exposure to select hedge funds can play various roles in a portfolio, acting either as a pure diversifier or as a substitute for other assets. Our analysis indicates that global discretionary macro hedge funds have historically shown an average correlation of 0.2-0.4 with various bond indexes since 1997, and exhibit negative downside correlation during periods of financial stress. We believe investors should consider having around 10% in hedge funds, funded by a combination of bonds and equities.

In hedge funds, we favor low net equity long/short strategies, macro, and multi-strategy, and select alternative credit.

The chart include two lines: one showing a 60/40 portfolio consisting of global equities and global bonds and one consisting of 40% global equities, 40% global bonds and 20% private equity trending above the first line. The chart suggests that the portfolio with exposure to private equity has outperformed, so an allocation to private equity has helped generate performance. Source: Bloomberg, Cambridge Associates and UBS with data starting in 3Q24.

Optimize your leverage

Borrowing is risky, but we believe that proactive, prudent, and strategic borrowing can enhance an investor’s financial plan, especially as interest rates fall.

If managed correctly, borrowing can help with:

Managing liquidity: A flexible line of credit can provide immediate access to funds without the need to sell assets, reducing the necessity of holding excess cash. This can be beneficial for handling tax bills, capital calls, or retaining the flexibility to make larger investments.
Improving diversification: Borrowing against existing assets to invest in less correlated assets may help smooth portfolio fluctuations and broaden return sources, with future cash flows used to gradually reduce debt.
Currency management: Borrowing in foreign currencies can help manage exchange rate risks associated with future foreign income and offer additional funds for domestic investments.
Boosting return potential: For those with a high risk tolerance, borrowing could potentially lead to higher long-term gains if returns exceed borrowing costs, particularly as interest rates decline. However, this strategy is risky, as leverage can amplify both losses and gains.

Investors should carefully compare loan rates with expected returns, consider refinancing and interest rate risks, and be aware of the potential for margin calls during market fluctuations.

The chart shows three lines representing 12-month rolling returns and hypothetical borrowing costs for the starting borrowing cost (1m SOFR + 3%), the annualized 24-month 60/40 portfolio return and the annualized 24-month borrowing cost (1m SOFT +3%). The chart suggests that a 60/40 portfolio would have yielded returns higher than borrowing costs, with the annotation adding this would have occurred in 73% of 24m periods, by an average of 3.4% per year. The indices used for the 60/40 portfolio are the S&P 500 total return and the Bloomberg government bond index, total return. The data is from Bloomberg, UBS, as of November 2024.

Be active

The investment industry has undergone a passive revolution in recent years. In 2023, assets held in global passive equity funds (USD 15.1 trillion) overtook assets in active funds (USD 14.3 trillion) for the first time, according to LSEG Lipper. But investors need to ensure they are balancing their exposure to passive and active strategies effectively.

In equities, passive investing can be a good way to quickly and cheaply add exposure to broad markets. But for investors looking to add exposure to new or less prominent markets, including small caps, emergent growth themes, or emerging markets, passive investments may be too broad to navigate fast-evolving industries or companies that are not as well covered. An active approach to investing can also enable investors to take advantage of changing volatility conditions, generating yield when volatility is high, or hedging portfolios when volatility is low.

In bonds, the complexities of managing weights, maturities, cash flows, duration risk, interest rate risk, and credit risk mean that actively managed funds can often offer greater convenience and superior risk management than investors trying to manage single bond exposure themselves.

Generating alpha is also a core aim of alternative investment managers.

Two bar charts, one for equities and one for fixed income, show the 5-year success rate for the annualized return, i.e., the percentage of managers beating the benchmark. Active strategies can be attractive, with a success rate of up to 68% in equities (small core) and 96% in fixed income (multi-sector bonds. The charts are used to show that active investing offers the opportunity to beat the benchmark. The note indicates the benchmarks considered: in Equities, S&P 500 (Large Core), Russell 2000 (Small Core), MSCI ACWI ex US (Foreign Large Div. Core), MSCI EM (Div. EM). In FI: Bloomberg US Aggregate (Core FI), Bloomberg Global Aggregate(Global FI), ICE BofA Fixed Rate Preferred (Preferred), Bloomberg US Universal (Multi-Sector Bonds), JPM EMBI Global Diversified (EM Debt). Success rates may be higher than actual experiences in certain categories due to potential survivorship bias. The data is sourced from UBS.

Go sustainable

All major asset classes, including equities, bonds, hedge funds, and private markets, offer sustainable options, which have shown similar risk and return characteristics to traditional investments. With the return of President Trump to the White House, we expect volatility but believe that the longer-term performance of diversified sustainable investing strategies will be driven more by investment fundamentals and the macro environment than by politics.

In stocks, we think investors can consider the equities of companies that are demonstrating improvements or leadership in ESG principles; or in fixed income; bonds issued by multilateral development banks or those with stated green intentions; or credit strategies with an active approach.

In alternatives, consider sustainable hedge funds. Such funds incorporate ESG factors into their investment processes, aiming to exploit market inefficiencies related to ESG issues. They thus may offer differentiated investment opportunities.

And in private markets, sustainable strategies focus on sectors such as renewable energy and sustainable agriculture, and aim to achieve positive environmental and social outcomes while providing diversification and potential for competitive returns.

Returns of global indices

Index	Index	1-year	1-year	5-year	5-year
Index	MSCI ACWI	1-year	33%	5-year	11.1%
Index	MSCI ACWI ESG Leaders Index	1-year	33%	5-year	11.1%
Index	Bloomberg US Treasury 5-10	1-year	9%	5-year	-0.7%
Index	Solactive Global MDB Bond USD 5-10	1-year	9%	5-year	-0.7%
Index	MSCI USA	1-year	38%	5-year	14.7%
Index	MSCI USA ESG Leaders	1-year	38%	5-year	15.1%

Philanthropy and blended finance

We see a growing opportunity set in investments that support sustainability and impact goals while aiming for competitive returns. However, some social and environmental issues cannot be easily addressed by investors seeking market-rate returns owing to factors like size, development stage, location, or business model. Philanthropic or concessionary funding can help attract commercial investors to these areas by reducing risks and encouraging more investment through structures like blended finance. While promising, blended finance deals are complex and need thorough assessment to meet investor expectations.

Explore more of the Year Ahead 2025 report

In our base case, we expect sustained economic growth in the US, supported by healthy consumption, loose fiscal policy, and lower interest rates. Tariff threats are a headwind for Asia and Europe. If imposed, they could be partially offset by reactive stimulus measures in China. We expect growth in Europe to modestly improve as interest rates fall

A Trump presidency, coupled with Republican control of Congress, has the potential to reshape the global economic and geopolitical landscape. Key policy areas in focus for investors include tariffs, fiscal policy, deregulation, monetary policy, and international relations.

Read more about the Year Ahead

The 5Ds—debt, deglobalization, demographics, decarbonization, and digitalization—will be significant forces in the decade ahead that present opportunities and risks for investors. In aggregate, we expect them to lead to higher growth and periods of higher inflation over the long term.

Since the beginning of the decade, cash returns have struggled to surpass inflation and bonds have faced headwinds from rising interest rates. In contrast, equities have thrived, and private markets and commodities have offered robust returns. Looking ahead, we expect equities and private markets to continue to offer the highest potential returns.

Read more about the Decade Ahead

Entering 2025, we believe stocks still have more to go, with our base case expectations of growth (despite tariffs), lower interest rates, and AI advancements. In fixed income, we think there is an opportunity to lock in yields for quality bonds. In currencies, while the dollar may remain strong in the short term, we believe it is looking stretched and advocate for selling it at further strength. We also like gold as a diversifier. Finally, we think the global real estate outlook looks promising.

Taking a step back, while these investment ideas present compelling cases for immediate action, developing a strategic plan that links goals with strategies can improve investors’ chance of success and help them stay focused on the bigger picture amid potential market turbulence.

Explore all our Top investment ideas

We aim to provide the direction of travel for the economy and asset classes against a wide range of market outcomes ahead. The upside scenario would see lower taxes, deregulation, and trade deals adding to a positive market narrative built on solid growth and continued investment in artificial intelligence, while the risk scenario is that trade tariffs, excessive fiscal deficits, and geopolitical strife will contribute to higher inflation, weaker growth, and market volatility.

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In this Year Ahead, we look at key developments that we believe will shape the next stage of these “Roaring 20s,” including US political change, falling interest rates, and transformational innovation in artificial intelligence and in power and resources.

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Disclaimers

Year Ahead 2025 – UBS House View
Chief Investment Office GWM | Investment Research

This report has been prepared by UBS AG, UBS AG London Branch, UBS Switzerland AG, UBS Financial Services Inc. (UBS FS), UBS AG Singapore Branch, UBS AG Hong Kong Branch, and UBS SuMi TRUST Wealth Management Co., Ltd.

Global asset class preferences definitions

The asset class preferences provide high-level guidance to make investment decisions. The preferences reflect the collective judgement of the members of the House View meeting, primarily based on assessments of expected total returns on liquid, commonly known indexes, House View scenarios, and analyst convictions over the next 12 months. Note that the tactical asset allocation (TAA) positioning of our different investment strategies may differ from these views due to factors including portfolio construction, concentration, and borrowing constraints.

Attractive: We consider this asset class to be attractive. Consider opportunities in this asset class.
Neutral: We do not expect outsized returns or losses. Hold longer-term exposure.
Unattractive: We consider this asset class to be unattractive. Consider alternative opportunities.

Note: For equities, we have collapsed “Most Attractive” with “Attractive” and “Least Attractive” with “Unattractive” from the five-tier rating system that is found in the Equity Compass into 3 tiers.

Cautionary statement regarding forward-looking statements

This report contains statements that constitute “forward-looking statements,” including but not limited to statements relating to the current and expected state of the securities market and capital market assumptions. While these forward-looking statements represent our judgments and future expectations concerning the matters discussed in this document, a number of risks, uncertainties, changes in the market, and other important factors could cause actual developments and results to differ materially from our expectations. These factors include, but are not limited to (1) the extent and nature of future developments in the US market and in other market segments; (2) other market and macroeconomic developments, including movements in local and international securities markets, credit spreads, currency exchange rates and interest rates, whether or not arising directly or indirectly from the current market crisis; (3) the impact of these developments on other markets and asset classes. UBS is not under any obligation to (and expressly disclaims any such obligation to) update or alter its forward-looking statements whether as a result of new information, future events, or otherwise.

Emerging Market Investments

Investors should be aware that Emerging Market assets are subject to, among others, potential risks linked to currency volatility, abrupt changes in the cost of capital and the economic growth outlook, as well as regulatory and sociopolitical risk, interest rate risk and higher credit risk. Assets can sometimes be very illiquid and liquidity conditions can abruptly worsen. CIO GWM generally recommends only those securities it believes have been registered under Federal US registration rules (Section 12 of the Securities Exchange Act of 1934) and individual State registration rules (commonly known as “Blue Sky” laws). Prospective investors should be aware that to the extent permitted under US law, CIO GWM may from time to time recommend bonds that are not registered under US or State securities laws. These bonds may be issued in jurisdictions where the level of required disclosures to be made by issuers is not as frequent or complete as that required by US laws.

Investors interested in holding bonds for a longer period are advised to select the bonds of those sovereigns with the highest credit ratings (in the investment-grade band). Such an approach should decrease the risk that an investor could end up holding bonds on which the sovereign has defaulted. Subinvestment-grade bonds are recommended only for clients with a higher risk tolerance and who seek to hold higher-yielding bonds for shorter periods only.

Nontraditional Assets

Nontraditional asset classes are alternative investments that include hedge funds, private equity, real estate, and managed futures (collectively, alternative investments). Interests of alternative investment funds are sold only to qualified investors, and only by means of offering documents that include information about the risks, performance and expenses of alternative investment funds, and which clients are urged to read carefully before subscribing and retain. An investment in an alternative investment fund is speculative and involves significant risks. Specifically, these investments (1) are not mutual funds and are not subject to the same regulatory requirements as mutual funds; (2) may have performance that is volatile, and investors may lose all or a substantial amount of their investment; (3) may engage in leverage and other speculative investment practices that may increase the risk of investment loss; (4) are long-term, illiquid investments; there is generally no secondary market for the interests of a fund, and none is expected to develop; (5) interests of alternative investment funds typically will be illiquid and subject to restrictions on transfer; (6) may not be required to provide periodic pricing or valuation information to investors; (7) generally involve complex tax strategies and there may be delays in distributing tax information to investors; (8) are subject to high fees, including management fees and other fees and expenses, all of which will reduce profits.

Interests in alternative investment funds are not deposits or obligations of, or guaranteed or endorsed by, any bank or other insured depository institution, and are not federally insured by the Federal Deposit Insurance Corporation, the Federal Reserve Board, or any other governmental agency. Prospective investors should understand these risks and have the financial ability and willingness to accept them for an extended period of time before making an investment in an alternative investment fund, and should consider an alternative investment fund as a supplement to an overall investment program.

In addition to the risks that apply to alternative investments generally, the following are additional risks related to an investment in these strategies:

Hedge Fund Risk: There are risks specifically associated with investing in hedge funds, which may include risks associated with investing in short sales, options, small-cap stocks, “junk bonds,” derivatives, distressed securities, non-US securities and illiquid investments.
Managed Futures: There are risks specifically associated with investing in managed futures programs. For example, not all managers focus on all strategies at all times, and managed futures strategies may have material directional elements.
Real Estate: There are risks specifically associated with investing in real estate products and real estate investment trusts. They involve risks associated with debt, adverse changes in general economic or local market conditions, changes in governmental, tax, real estate and zoning laws or regulations, risks associated with capital calls and, for some real estate products, the risks associated with the ability to qualify for favorable treatment under the federal tax laws.
Private Equity: There are risks specifically associated with investing in private equity. Capital calls can be made on short notice, and the failure to meet capital calls can result in significant adverse consequences including, but not limited to, a total loss of investment.
Foreign Exchange/Currency Risk: Investors in securities of issuers located outside of the United States should be aware that even for securities denominated in US dollars, changes in the exchange rate between the US dollar and the issuer’s “home” currency can have unexpected effects on the market value and liquidity of those securities. Those securities may also be affected by other risks (such as political, economic or regulatory changes) that may not be readily known to a US investor.

CIO research disclaimer

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