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As President Trump assumes office, investors should prepare for volatility and potential policy surprises, particularly with respect to trade policy, and should consider portfolio diversification and hedging approaches. In equities, capital preservation strategies can help manage downside risks. Investors should manage allocations to long duration bonds carefully, given fiscal risks. We think long USDCNY could be an effective hedge against trade risks, while oil prices could move higher if pressure on Iran is stepped up. We also continue to see gold as an effective hedge against geopolitical and inflation risks.

President Trump’s inaugural address made pledges to bring down inflation, boost energy production, and levy tariffs on imports. In the first few days of the administration, the US has threatened tariffs on Mexico, Canada, China, and the European Union. And with President Trump yet to unveil details on the US’s stance toward Iran, Russia, and Ukraine, a combination of US domestic political uncertainty and geopolitical tensions will likely lead to pockets of volatility in global markets.

We identify several ways to navigate these risks and higher market measures of volatility, whether hedges or more opportunistic ways to buy assets at potentially lower prices:

Capital preservation strategies in at-risk markets, including Asia

Capital preservation strategies combine a zero-coupon bond with a call option that allows one to buy an asset at a pre-determined price. Higher interest rates and bond yields make the bond element cheaper, while below-average implied volatility would mean investors could participate in more of the potential gains in the asset on which they bought a call.

We believe this strategy could help to limit losses while staying invested in stocks most sensitive to US trade policy, including in Asia. Looking into 2025, we still believe that major central banks will continue their global rate-cutting cycle as inflation normalizes and as a means of moving monetary policy toward long-term neutral rates. This process would make zero-coupon bonds more expensive. And the historical relationship between interest rates and equity implied volatility suggests a potential rise in the cost of call options on stocks. We therefore believe capital-preservation strategies provide interesting opportunities for investors to express their equity views.

Buy on dips in structural trends, including AI

Reverse convertibles, a type of structured investment that combines a bond with a put option have the potential to offer higher yields compared to the market and can help investors buy assets on dips that they would like to hold for the longer term, such as stocks linked to AI and to power and resources.

Investors can consider them as a more defensive way to buy an asset, especially if they expect the asset to deliver moderate returns in the near term. The coupon payments from this type of structured strategy can provide returns or a buffer against price corrections. Investors looking to buy a particular asset but at a lower level than today’s market price may also see merit in this approach, if the reverse convertible investment is settled with the physical asset. And investors looking to sell volatility in periods when implied market volatility is high may also be interested in this approach. Generally, higher volatility leads to higher coupon payments.

Investing in reverse convertibles comes with risks, including the possibility of losing part of the invested capital if the underlying asset's price falls significantly.

Manage long duration bond exposure

Long-end rates in many developed markets have moved higher due to a repricing of the expected end point of the Fed's rate-cutting cycle, higher term-premiums given fiscal policy uncertainty in the US and elsewhere, international developments, and seasonal January supply effects.

Investors should therefore refrain from excess exposure to more volatile long-dated government bonds, preferring instead the 5-year point in high grade bonds. We also see opportunites to generate additional yield through reverse convertibles on US Treasuries, as an income diversifier.

Long USDCNY

We believe the yuan will continue to face pressure from President Trump’s proposed tariff plans, which may lead the People’s Bank of China (PBoC) to permit further depreciation of the currency. A weaker CNY against the dollar could help mitigate some of the negative impacts of any tariff hikes. Additionally, vulnerable domestic economic fundamentals are likely to weigh on yuan sentiment, contributing to higher FX demand and investment outflows. Overall, we like to be long USDCNY, targeting a move toward 7.50 in the coming months, which could also provide positive carry of 2.1% p.a. We believe a stop-loss of 7.20 is prudent.

Gold

We expect gold prices to recover and climb in the year ahead. Geopolitical risks are elevated and US monetary policy outcomes are far from certain, with money market pricing currently predicting only 39bps of cuts by the Fed in 2025 (versus our view for 50bps). Meanwhile, we expect central bank demand to remain solid—we forecast purchases of around 900 metric tons in 2025—driven by diversification and dedollarization trends. Moreover, an increasing US federal deficit and the worsening of the US debt profile over the long run should underpin gold's attractiveness versus the US dollar. From this perspective, we believe holding around 5% to gold within a USD balanced portfolio is optimal.

Oil

Crude oil prices recently broke above USD 80/bbl on additional US sanctions on Russia that targeted energy producers, shippers, insurers, tankers, and traders. We expect these moves to reduce Indian and Chinese demand for Russian oil. Coupled with comments by officials of the upcoming Trump administration regarding their desire to reintroduce a “maximum pressure campaign” on Iran, we see risks of higher oil prices in the short term. We therefore like to generate income by selling the risks of crude oil prices falling.

More investment ideas

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Lock in yields

24 Jan 2025

We believe that high grade and investment grade bonds offer compelling risk-reward, and we expect mid-to-high single digit returns for medium duration bonds in US dollar terms over the next 12 months. We also believe investors should pursue means of diversifying and boosting portfolio income, including through diversified fixed income strategies, senior loans and private credit, and through equity income strategies. In relative value, we like UK gilts relative to French OATs.

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More to go in stocks

24 Jan 2025

We expect the S&P 500 to reach 6,600 by the end of 2025, 10% higher than current levels. The potential imposition of tariffs could lead to volatility in the short term, but we believe that strong US economic growth and structural tailwinds from AI should be supportive. We also see value in maintaining diversified exposure to Asia ex-Japan. In Europe, we like EMU small- and mid-cap stocks and Swiss high-quality dividend stocks.

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Transformational innovation opportunities

24 Jan 2025

We expect significant and sustained profit growth in the transformational innovation opportunities of (1) Artificial intelligence and (2) Power and resources. By investing in these areas, we believe investors can earn strong long-term returns.

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Harvest currency volatility

24 Jan 2025

Higher volatility in currency markets provides the opportunity to boost portfolio income and earn additional yields in exchange for agreeing to make currency conversions at specific prices. Over the next 1-3 months, we like picking up yield by selling the upside in EURUSD and downside in USDCHF. Over the next six months, we like selling upside in CHFJPY, EURGBP, and EURAUD, and downside in GBPUSD, GBPCHF, and AUDUSD. While the US dollar may remain well bid in the near term, we expect modest weakness over the balance of 2025. Meanwhile, we believe yen and pound weakness may be approaching their limits.

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Go for gold

24 Jan 2025

We expect gold to resume its rally in 2025. We expect the trend of central bank reserve asset diversification to continue, while geopolitical risks, government debt concerns, and inflation uncertainty are contributing to robust investor demand. We expect prices to rise to USD 2,850/oz by the end of the year. We also expect upside for silver prices in 2025.

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Time for real estate

24 Jan 2025

We believe the outlook for global residential and commercial real estate investments is bright. With constrained supply and rising demand, we see opportunities in sectors such as logistics, data centers, and multifamily housing. Investors should focus on quality assets and strategic diversification to capitalize on these favorable market dynamics.

Explore more of the Year Ahead 2025 report

In our base case, we expect sustained economic growth in the US, supported by healthy consumption, loose fiscal policy, and lower interest rates. Tariff threats are a headwind for Asia and Europe. If imposed, they could be partially offset by reactive stimulus measures in China. We expect growth in Europe to modestly improve as interest rates fall

A Trump presidency, coupled with Republican control of Congress, has the potential to reshape the global economic and geopolitical landscape. Key policy areas in focus for investors include tariffs, fiscal policy, deregulation, monetary policy, and international relations.

The 5Ds—debt, deglobalization, demographics, decarbonization, and digitalization—will be significant forces in the decade ahead that present opportunities and risks for investors. In aggregate, we expect them to lead to higher growth and periods of higher inflation over the long term.

Since the beginning of the decade, cash returns have struggled to surpass inflation and bonds have faced headwinds from rising interest rates. In contrast, equities have thrived, and private markets and commodities have offered robust returns. Looking ahead, we expect equities and private markets to continue to offer the highest potential returns.

Entering 2025, we believe stocks still have more to go, with our base case expectations of growth (despite tariffs), lower interest rates, and AI advancements. In fixed income, we think there is an opportunity to lock in yields for quality bonds. In currencies, while the dollar may remain strong in the short term, we believe it is looking stretched and advocate for selling it at further strength. We also like gold as a diversifier. Finally, we think the global real estate outlook looks promising.

Taking a step back, while these investment ideas present compelling cases for immediate action, developing a strategic plan that links goals with strategies can improve investors’ chance of success and help them stay focused on the bigger picture amid potential market turbulence.

We aim to provide the direction of travel for the economy and asset classes against a wide range of market outcomes ahead. The upside scenario would see lower taxes, deregulation, and trade deals adding to a positive market narrative built on solid growth and continued investment in artificial intelligence, while the risk scenario is that trade tariffs, excessive fiscal deficits, and geopolitical strife will contrib­ute to higher inflation, weaker growth, and market volatility.

Mockup of Year Ahead 2025 publication

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In this Year Ahead, we look at key developments that we believe will shape the next stage of these “Roaring 20s,” including US political change, falling interest rates, and transformational innovation in artificial intelligence and in power and resources.

Disclaimers

Year Ahead 2025 – UBS House View
Chief Investment Office GWM  |  Investment Research

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.