Mark Haefele, Chief Investment Officer, Global Wealth Management

As we approach the end of the first quarter, equity markets are buoyant, and a strong US economy has diminished expectations for rate cuts. Despite geopolitical uncertainties, cross-asset volatility has remained low. Looking ahead to the second quarter, we see the next stage of two primary market drivers playing out: the start of rate-cutting cycles by major central banks, and the broadening-out of AI adoption and implementation across a wider range of companies.

Against this backdrop, we believe investors’ key focus should be on: 1) getting their exposure to the technology sector right; 2) ensuring that portfolio income streams are sustainable; and 3) employing effective portfolio risk management techniques.

What does that look like in practice?

First, it’s important to hold a diversified strategic exposure to the technology sector and to some of the likely winners from tech disruption. We foresee 18% earnings growth for the global technology sector this year and 72% annualized growth in AI revenues over the next five years. The rising excitement over artificial intelligence and its implications could lead to a scenario in which future gains are frontloaded. Investors looking to grow wealth should ensure they have exposure to this space.

But equally, after such a strong run in AI-related stocks, the risk of overconcentrating portfolios has risen. Structured strategies can play a role in helping investors manage downside risks in tech. For those looking to diversify, we see opportunities beyond technology—in quality stocks across regions; in alternative growth themes like the energy transition, healthcare disruption, and water scarcity; and in small- and mid-cap stocks.

Second, although the US economy has remained strong and inflation has surprised to the upside, we still expect the Federal Reserve to cut interest rates in the coming months, likely starting in June. The Swiss National Bank announced a 25-basis-point rate cut in March, and other major central banks are also on track to start easing policy. To prepare portfolios, investors need to be proactive and shift their cash and money market holdings toward more durable sources of income, including fixed-term deposits, short-term bond ladders, and medium-duration high-quality bonds. We expect major currency pairings to continue to trade in their recent ranges, presenting opportunities for investors to generate added income through tactical currency trades.

Third, effective risk management is key. The temptation to manage risk by simply cashing in on gains or retreating to the sidelines may be strong, but history favors those who pursue a more balanced approach. We believe that only by diversifying across asset classes, regions, and sectors can investors effectively manage the tension between navigating short-term market dynamics and growing long-term wealth.

For more on these ideas, please refer to the UBS House View Quarterly, also published alongside this Monthly Letter. In the rest of this letter, I will discuss three of the big questions investors are asking today: 1) Is tech in a bubble, and what to do now?; 2) Soft landing or no landing, and where next for the Fed?; and 3) How to manage risks with markets at all-time highs?

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