How to Get Your Portfolio Ready for Q4

As we nearing the final quarter of 2024, market sentiment is largely positive, with equity indices hitting new heights. This buoyancy is supported by aggressive interest rate cuts from the Federal Reserve, alongside rising expectations for a soft landing for the US economy. Global stocks are on course for their fourth consecutive quarter of gains, and bonds are benefiting from decreasing inflation and anticipated additional easing measures from central banks.

However, alongside this optimism, uncertainties persist, and investors must be ready for the challenges that lie ahead as we approach year-end.

Analysts from UBS have highlighted the narrowing window for portfolio adjustments, as central banks ramp up their rate-cutting cycles. An unexpected 50-basis-point cut by the Federal Reserve has initiated a cycle of easing, with forecasts suggesting further cuts of 50 basis points in 2024 and an additional 100 basis points the following year. Similarly, other major central banks, including the European Central Bank and the Bank of England, are expected to follow suit.

While these rate reductions are beneficial for equities, they will likely reduce returns on cash. Investors face diminishing viability in holding surplus funds in deposits or money market instruments as cash yields decline alongside interest rates. In response, UBS recommends reallocating assets towards income-generating investments that provide more stable returns. Strategies such as bond ladders, medium-duration investment-grade bonds, and diversified fixed-income options can help maintain portfolio income, particularly as cash holdings become less attractive.

With the changing monetary landscape, the upcoming US election poses an additional risk of market volatility. UBS analysts warn that the election results could profoundly affect sectors like US consumer discretionary and renewable energy, both of which are sensitive to changes in public policy. A scenario in which one political party controls both Congress and the White House could result in significant regulatory and tax reforms, affecting tariffs and business regulations. This situation brings both risks and opportunities for investors, dependent on the industries concerned.

It is crucial not to overly speculate on specific political outcomes, as positioning portfolios to benefit from a particular election result might lead to setbacks, particularly in such a closely contested race. UBS advises managing exposure to vulnerable sectors in the US while remaining aware of currency risks, particularly those associated with the Chinese yuan. Regardless of the election’s outcome, ongoing strategic competition between the US and China is expected to continue, favoring companies that focus on reshoring and reducing dependence on foreign manufacturing.

Economic uncertainty and geopolitical tensions may exacerbate volatility in equity markets. Despite the Federal Reserve’s optimistic outlook regarding the US economy—highlighting strong growth and low recession risks—investors should remain cautious. Weak economic indicators and conflicts in regions like the Middle East could quickly shift market sentiment. Diversification of portfolios is emphasized by UBS as a protective measure against such risks; spreading investments across various asset classes can better equip investors to endure potential shocks.

The artificial intelligence sector continues to be a significant long-term growth theme, with UBS noting that this technological evolution is expected to be a major market driver in the coming years. For those currently underexposed to AI, dips in the market may present opportunities for increasing investments in this transformative sector. Conversely, investors who are heavily invested in AI stocks may want to adopt capital preservation strategies to secure gains against possible downturns.

In these uncertain times, alternative investments can provide additional layers of protection and diversification. Hedge funds that exhibit low correlations with conventional assets may help lessen portfolio volatility, while private equity and infrastructure investments can offer growth exposure outside public markets, which may prove more resilient to short-term fluctuations. Private credit, with its attractive yield profile, also presents a compelling alternative for income-seeking investors in a low-rate environment. However, these asset classes carry risks, including reduced liquidity and transparency, making them suitable only for investors who can manage these factors.

Gold has re-established itself as a critical safe haven amid escalating geopolitical tensions and the Fed’s easing cycle. With spot gold prices hitting an all-time high of $2,630 per ounce, rising approximately 27% year-to-date, UBS foresees further upward potential. Ongoing strong institutional demand is expected to support gold prices into 2025, potentially elevating them to $2,700 per ounce. For those looking to hedge against geopolitical threats and inflationary pressures, gold remains a highly favored asset within UBS’s strategy. Investors can gain exposure through options like physical gold, structured products, exchange-traded funds, or gold mining stocks.

As the Federal Reserve continues its rate-cutting initiatives, analysts at UBS assert that fixed-income markets will remain attractive for generating stable returns. Although they take a tactically neutral stance towards fixed income, UBS notes that the overall bond market holds valuable opportunities for income generation in the near future. Investors can anticipate up to 100 basis points of further cuts in 2024, with additional reductions likely in 2025. This trajectory indicates that bonds, particularly those with higher credit quality and medium duration, will become increasingly appealing compared to cash or lower-yielding money market options.