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The Year Ahead
Messages in Focus
19 January 2024: This investment view is now outdated. Reach out to your advisor for our current views.
We believe investors should limit their overall cash balances in the year ahead. Interest rates are likely to fall in 2024, potentially sharply. This will reduce the return of cash and increase reinvestment risks.
Fixed term deposits
Interest rates on cash are poised to fall in 2024, in our view, as global growth slows and inflation continues to moderate. With this in mind, we believe investors should use fixed-term deposits to lock in currently high yields on cash and cover potential expenses and liabilities up to 12 months out. 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 can help provide investors with added certainty over future returns. A bond ladder involves buying a series of individual short-duration bonds of varying maturities, staggered to provide a steady stream of income, and aligned with the size and timing of expected portfolio withdrawals over the next 12–36 months. With the Fed likely to cut interest rates in most economic scenarios, we advocate locking in yields today rather than waiting for a potential first-quarter retracement as supply comes to market. Holding quality bonds may also offer scope for capital gains in downside economic scenarios.
Structured strategies with capital preservation features
For cash intended for use in 3–5 years’ time, liquidity and safety concerns need to be balanced with the opportunity costs from potential stock market rallies. Investors concerned about limiting losses but who also wish to participate in further equity gains can consider structured investment strategies with capital preservation features. Equity market volatility is still low by historical standards, improving the pricing of such strategies. We suggest using these tools to cover longer-term liabilities, since costs may apply if investors need to sell before maturity.
Changes in interest rates, implied volatility, and dividend levels can also influence the pricing of structured strategies. Investors should be aware of the additional risks borne when using structured strategies or other options-based strategies, including that the issuer fails to meet its obligations or repay an investor’s principal at maturity.
How to structure your liquidity
< 1 year
Fixed term deposits
1–3 years
Bond ladders
3–5 years
Structured solutions
In our downside scenario, weaker economic growth would lead to significant weakness in global equity markets. The good news is that implied equity market volatility has fallen to multi-year lows, making this an attractive time against market risks.
We expect the US dollar to stay stable around current levels over the coming months, though USD weakness may emerge later in the year as US rates fall. This makes selling USD upside for yield pickup attractive. Meanwhile, we expect oil prices to fluctuate in the USD 80–90/bbl range in 2024, creating opportunities for investors to sell downside risks or navigate the range.
A new world will see significant investments in healthcare, digitalization, and energy. But high government debt levels mean public funding for innovation is likely to be constrained.
We expect high global debt balances to contribute to elevated price and spread volatility, driving investors to seek ways to benefit from dispersion. This is a supportive backdrop for various credit strategies, including credit arbitrage and distressed debt. We also see opportunities in convertible arbitrage, a strategy in which we expect to see more opportunities as companies refinance maturing debt.
We expect mid- to high-single digit positive returns for both equities and bonds in the year ahead. But within each asset class, we believe investors should focus on quality. In fixed income, quality bonds offer attractive yields and should deliver capital appreciation if growth and rates undershoot market expectations.
We expect some of the highest returns in equity markets over the decade ahead to come from those companies that can harness new technologies to grow markets, dislodge incumbents, or slash costs.
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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..
