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.
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.
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 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.
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.
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.
Other chapters
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..
