The chief investment office of Swiss private bank UBS has just released its mid-year outlook 2024, assessing asset allocation in a year of elections and key trends.

After equity markets rallied in the first half of 2024, backed by an artificial intelligence-driven boost to corporate profit expectations, UBS's CIO highlighted how keeping a long-term core allocation to a mix of equities, bonds, and alternatives will help investors position for uncertainty.

“In the second half of the year, the US will decide its next president, artificial intelligence should continue to advance rapidly, and US interest rates will likely be cut,” UBS said in its report. For investors, the Zurich-listed bank expects outcomes to be driven by several factors, including whether markets will start to price in a deeper rate-cutting cycle or anticipate rates staying high for even longer. It will also depend on whether investors remain confident that the payoff from artificial intelligence will justify investments made so far and how shifting expectations about US government policy affect markets.

UBS believes that keeping a long-term core allocation to a mix of equities, bonds, and alternatives can help investors position for uncertainty.

Nevertheless, the bank sees opportunities for decisive action to make sure that portfolios are well positioned in the months ahead. First, UBS thinks that slower economic growth and inflation data in the second half of 2024 will lead to interest rate cuts by major central banks and prompt markets to price in lower interest rates for the future.

It recommends that investors prepare by moving excess cash holdings into quality fixed income. UBS also thinks that lower US interest rates could add to depreciation pressures on the dollar while supporting commodities. The Swiss bank recommends that investors sell into dollar strength and seek opportunities in commodity markets.

Second, UBS thinks that AI will prove to be one of the largest investment opportunities in human history, so investors need to ensure that their portfolios are “AI enabled.” UBS likes the semiconductor companies currently benefiting from high rates of AI investment, and the vertically integrated oligopolies in both the US and China that are well positioned across the AI value chain. Nevertheless, as the second half evolves, UBS believes that there is a risk that fears about over-investment could lead to a correction. Capital preservation strategies can help navigate this risk.

Investors should also seek quality growth beyond that which is available in the tech sector, in UBS’s view. The private bank sees a variety of opportunities, including in global quality wealth compounders and Europe's Magnificent 7 (ASML, Adyen, SAP, RELX, Infineon, STMicroelectronics, CAPgemini), in firms providing products and services supporting the energy transition, and in those alleviating ocean pollution and water scarcity.

UBS also expects equity market volatility to rise as the US presidential election approaches in November, believing that it is prudent to consider risk management approaches. In equities, UBS thinks the US consumer discretionary and renewables sectors could be at risk in the scenario of a Trump victory and Republican control of Congress (i.e., a “red sweep”). The Swiss bank see more potential upside for financials in that scenario. Investors could also consider strategies to effectively hedge risks in particularly election-sensitive stocks, subject to awareness of the risks of such strategies and implementation constraints.

UBS thinks gold can act as an effective hedge against fears related to geopolitical polarization, inflation, and excessive deficits. The second half of 2024 will be decision time for central banks, for the US electorate, and for investors. The choices made now will be crucial for successfully navigating the evolving landscape of AI, interest rate changes, and the US election, UBS concluded.