"New problems are appearing without the old ones being resolved," stated the UBS CEO
UBS Chief Executive Officer Sergio Ermotti warned that financial markets have exhibited excessive complacency in recent years, right as geopolitical risks and economic threats multiply. "There has been a level of complacency in financial markets over the past few years," Ermotti stated in an interview with CNBC and Christine Tan, emphasizing that, given the current environment, one would expect much higher levels of market volatility. Despite intermittent episodes of market turbulence, robust investments in artificial intelligence, data centers, and other emerging technologies have supported economic growth and financial markets. However, the head of UBS warned that investors are facing an increasingly complex environment as multiple pressures continue to pile up. "New problems or new issues are appearing without any of the old ones having been addressed or resolved," he pointedly stressed.
Wars, energy, and US-China tensions pressure the economy
According to Ermotti, markets are confronting a dangerous mix of geopolitical and economic risks. Wars in Iran and Ukraine create severe risks for energy supplies and transport, while the ongoing confrontation between the US and China has placed severe strain on global supply chains. At the same time, elevated borrowing costs and persistent inflation are creating additional obstacles for sustained economic recovery. This environment is prompting some of the world’s wealthiest investors to further diversify their holdings rather than committing to massive, single-direction investment strategies.
"Not an environment for high conviction"
"It is quite a difficult environment, and it is really not advisable to hold too many high-conviction bets," Ermotti noted. As he explained, UBS clients have increased their portfolio diversification across different sectors and geographic regions in recent months, while continuing to invest significantly in artificial intelligence and tech. Nevertheless, the overall asset allocation of UBS clients has not fundamentally shifted over the past year. Nor does this increased appetite for diversification signal a mass exit from US assets.
Investors are not abandoning the US and the dollar
Ermotti mentioned that approximately a year ago, UBS had observed some capital inflows into global emerging markets. However, he characterized these movements more as the deployment of available cash rather than an active reduction of existing positions in US assets or the greenback. "It was more about how excess available cash was positioned, rather than people actively moving away from the US or the US dollar. Therefore, I believe that narrative has receded," he noted. In fact, he emphasized that the greenback continues to serve as the global reserve currency.
Interest rates: Higher for longer
Another major front for investors is the outlook on interest rates. Stubbornly high inflation maintains pressure on central banks, and according to the UBS CEO, investors will need to adjust to an environment where the cost of money remains high for an extended period. Ermotti estimates that inflation has remained persistent and above central bank targets over the past year, making further monetary policy tightening likely. Indeed, he expects rate hikes from major central banks, including the European Central Bank (ECB), the Federal Reserve, and the Bank of Japan. "The ECB may begin a hiking cycle. The Federal Reserve will follow. We expect several hikes in the coming months," he stated. This assessment means investors should not expect a rapid return of borrowing costs to the low levels seen before the latest surge in inflationary pressures. "Inflationary pressures are still present and are not receding. Therefore, I consider it logical to expect higher interest rates for the foreseeable future," Ermotti concluded.
The message from UBS
The message from the UBS chief comes at a time when markets remain highly sensitive to developments in energy, inflation, interest rates, and geopolitical tensions. Recent developments in the Middle East have already heightened concerns regarding inflation and the trajectory of monetary policy, while UBS has revised upward its forecasts for future policy actions by the Federal Reserve. Ermotti's key takeaway is clear: markets may be displaying far more composure than actual financial risks warrant. And as long as geopolitical conflicts, inflation, and high capital costs remain at the forefront, portfolio diversification and risk management become even more critical.
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