19 February 2024, 3:10PM UTC

Top 10 questions answered

UBS House View Briefcases
Christopher Swann, Strategist, UBS Switzerland AG; Vincent Heaney, Strategist, UBS AG London Branch

• How can I hedge market risks? ............................................................................................... 2

• What's next for bonds in 2024? ............................................................................................... 3
• Do hedge funds make portfolios more or less risky? ............................................................................................... 4
• Can small-caps add value to my portfolio? ............................................................................................... 5
• Can equities rally further from all-time highs? ............................................................................................... 6
• Is it time to reduce my cash holdings? ............................................................................................... 7
• Why invest in a balanced portfolio now? ............................................................................................... 8
• Should investors look at asset-based finance? ............................................................................................... 9
• What's next for sustainable investing in 2024? ............................................................................................... 10
• How should I invest in tech in 2024? ............................................................................................... 11

This report has been prepared by UBS Switzerland AG and UBS AG London Branch. Please see important disclaimers and disclosures
that begin on page 13.
How can I hedge market risks?
New this week
Key message Buoyant inflation prints, coupled with robust employment data
recently saw market expectations on the Fed turn decidedly
After a brief shaky start to 2024, equities have rebounded strongly, with
hawkish. The total amount of rate cuts priced in for 2024 has
the S&P 500 hitting all-time highs. Excessive optimism over the pace of
now fallen to just 88bps from 115bps last week, and more in
Federal Reserve easing had perhaps grown into the most serious threat to risk
line with our expectations. The first 25bps rate cut is now only
appetite, in addition to the wars in Eastern Europe and the Middle East. This
expected in June, with a 75% probability. The S&P 500 has
has started to reverse but further correction is not beyond the pale. While no
consequently fallen 0.5% since its high on 15 February, and the
hedge works for all risks, we see various ways investors can reduce threats to
VIX US volatility index has rebounded sharply.
their portfolios, including sticking to quality bonds, which are typically resilient
across a range of market scenarios.

One liner
House view
Excessive optimism over the timing and pace of Fed easing
remains perhaps the most serious near-term threat to
US equities might be starting to roll over, but are still
01 near record highs
confidence and risk appetite.

• The S&P 500 fell 0.5% from its 15 February peak but is still up 6.8% from 4 January Did you know?
and 21.6% from 27 October.

• The 10-year US yield climbed to 4.3%, still down from a 16-year peak of 5% in late
October 2023.
• The World Bank said the price of Brent could rise to more
than USD 150 a barrel (versus around USD 85 presently)
• Market pricing is now implying a roughly 75% chance of a 25bps rate cut by the if the conflict in the Middle East escalates, echoing the
Fed's June policy meeting, based on the CME's FedWatch Tool. economic shock of the 1970s when major producers
reduced output.

• 2024 will be a record-breaking year for elections. More

A correction to Fed policy expectations could compound
02 spikes in geopolitical risks.
than two billion voters in 50 countries will be heading
to the polls. This could contribute to choppy returns in
particular countries, sectors, and industries.

• US labor market and core inflation both remain resilient and market are finally paring
back aggressive Fed cut expectations.

• The wars between Russia and Ukraine, and Israel and Hamas still hold the potential Investment view
to trigger volatility spikes.
No single hedge protects investors against all risks, but a range
• The US presidential election is set to add uncertainty to both the fiscal situation and of strategies can help mitigate volatility or drawdowns for
geopolitical tensions, especially with China. portfolios. Investors looking to hedge against the risk of losses
can make use of structured strategies with capital preservation
features. Investors worried about the potential market impact
We recommend a range of strategies for investors of further escalation in the Israel-Hamas or Russia-Ukraine wars
03 seeking to smooth returns. can consider hedging portfolios through oil market investments
or energy stocks. We also think gold can provide a potentially
effective portfolio hedge against rising geopolitical tensions
• Structured strategies can be helpful when stocks fall. Macro hedge funds can
navigate periods of economic uncertainty.

• Oil would likely spike higher if the Israel-Hamas war escalates or broadens. And gold
has proven its value as a portfolio hedge in recent months.

• Despite yield volatility, we expect positive returns for quality bonds across a range of
market scenarios in 2024.

UBS CIO WM 19 February 2024 2

What's next for bonds in 2024?
Key message
The performance of global bonds has continued to fall as markets reassess
the prospects for rate cuts this year by the Federal Reserve. But with rate cuts
still on the horizon, we reiterate the need for investors to manage liquidity,
limiting cash balances and locking in yields. We remain most preferred on
high-quality bonds.
House view
01 The rally in bonds has faltered since the start of the year.
• Yields on 10-year US Treasuries climbed from a low of 3.79% in late December to
around 4.3% on 16 February.
• Fed funds futures markets are only pricing in less than 100 basis points of cuts,
down from as much as 170bps at the peak in January. This came after strong US
employment growth and higher-than-expected inflation data for January.
But yields can fall further in 2024 as real rate
02 expectations decline.
• We continue to believe quality bonds can advance further in 2024 as US inflation
fades, growth slows, and the Federal Reserve cuts rates.
• The current market-implied long-term real policy rate is still above the Fed's 0.5%
estimate.
• We think a tapering of the Fed's bond-selling program is likely to reduce upward
pressure on real rates, driving the next leg lower in yields.
We advise locking in current high yields on quality
03 bonds.
• With rate cuts on the horizon, we reiterate the need for investors to manage
liquidity, limiting cash balances and locking in yields.
• Although yield volatility is likely to remain high in the near term, we expect positive
returns for quality bonds across a range of market scenarios in 2024.
• In our base case, we expect 8.5% returns for high-quality, medium-duration bonds
this year, versus 4.3% for cash.
New this week
The US's January inflation report showed monthly headline
CPI increased 0.3% from December, versus expectations for
0.2% month-over-month, with the strength largely reflecting
start-of-year price increases for labor-reliant categories such as
medical services, car insurance and repair, and daycare.
One liner
With rate cuts on the way, investors should consider taking
advantage of current attractive yields.
Did you know?
• US government bonds have outperformed USD cash in
83% of five-year periods since 1925. If we look at all
five-year periods since January 1977 (the earliest point
with available data on a higher 2-year than 10-year
Treasury yield, known as curve inversion), US government
bonds have outperformed about 90% of the time, and
in 97% of five-year periods when the yield curve was
inverted at the beginning of the five-year period.
• Recent FOMC minutes showed that Fed officials were
already discussing when to reduce the pace of its bond-
selling program (quantitative tightening).
• Core PCE data has cooled from the peak and 6-month
Core PCE data is close to the Fed's 2% inflation goal.
Investment view
Overall, we think quality fixed income has an attractive risk-
return proposition. We see gains across a range of scenarios,
including our base case for a soft landing in the US. Returns
would likely be greatest in the event of an economic hard
landing. But we forecast a positive outcome even in the event
of stronger-than-expected economic growth.
UBS CIO WM 19 February 2024 3
Do hedge funds make portfolios more or less risky?
New this month
Key message The VIX index of implied US stock volatility stood at 14.2 as
of 19 February, well below the average of close to 20 since
Hedge funds are seen as too risky by some. Investors must be able to bear
its inception in 1990. This suggests investors are relatively
certain risks not always experienced in stocks and bonds. But adding hedge
sanguine about the potential for large market shifts in coming
funds to a portfolio can reduce risks to overall wealth. Hedge funds can help
months.
smooth portfolio returns, add diversification, and grant access to parts of
the market that are often off limits to many investors. Certain hedge fund
strategies are also well-placed to outperform in market downturns. We see
the best current opportunities in macro, multi-strategy, and credit funds. One liner
We think hedge funds are powerful tools for managing risk and

House view diversifying sources of return.

Hedge funds come with a range of potential pitfalls,

01 which need to be understood and managed. Did you know?

• Hedge fund strategies that invest in illiquid assets, such as distressed debt, can limit
investors' access to their money in a fund for 1–3 years.
• Hedge funds often don't share details of their strategy, making funds less
transparent to investors.
• Complexity is an additional risk, with some strategies using more exotic instruments
that individual investors may not understand.
But savvy hedge fund investing can smooth returns and
02 add new sources of return.
• The ease of selling a hedge fund (its liquidity) depends
on how the manager invests. Funds working with more
liquid securities (like Commodity Trading Advisors), may
offer investors easier access to their funds than distressed
debt funds or event-driven funds—which operate in less
liquid instruments.
• Select hedge fund strategies can outperform in hostile
market conditions. Between 2000 and 2002, the bursting
of the "dot com bubble" led to a 47% fall for the MSCI
All Country World Index. Equity market neutral funds
lost just 0.4% and merger arbitrage 0.8% in the same
period, based on Bloomberg and HFR data.

• Some strategies, like macro funds, can make money even in falling markets, • A 20% addition of equity hedge fund substitutes to a
dampening swings in portoflios. 60/40 portfolio would have lowered portfolio swings
with little change in returns between 2000 and 2022.
• Hedge funds can add sources of return beyond public bonds and stocks, while
This smoothing can result in swifter compounding of
manager skill can help beat major indexes (or "generate alpha").
returns and higher wealth over long time horizons.
• Holding a collection of hedge fund approaches—including multi-strategy funds—can
help investors avoid over-concentration and achieve diversification.

Investment view
So, we think the asset class can play a positive role in
03 portfolios, both now and in the years to come.
Within hedge funds, we particularly like specialist credit hedge
fund strategies. Discretionary macro funds and multi-strategy
funds have proven resilient during crisis periods. Investors
should understand the inherent risks of hedge funds, including
• With 2024 likely a year of elevated economic and political uncertainty, macro and
illiquidity, lack of transparency, and use of leverage.
multi-strategy funds are well-placed to exploit shifting market conditions.

• Elevated debt levels and interest rates above pre-pandemic levels create
opportunities for credit funds that take advantage of mispricing between stronger
and weaker borrowers.

UBS CIO WM 19 February 2024 4

Can small-caps add value to my portfolio?
New this week
Key message The Russell 2000 small-cap index advanced 1.1% last week,
compared to a decline of 0.4% for the S&P 500. Still, the large-
Small-cap stocks have recently lagged the broader equity rally. But after
cap index has outperformed small-caps so far this year.
a prolonged period of underperformance, we now believe small-caps are
attractively valued. This part of the market also stands to gain more from Fed
rate cuts in 2024, since smaller companies are more reliant on floating rate
debt than larger peers. Small caps would benefit even more in the event of One liner
a “Goldilocks” outcome of strong US growth, falling inflation, and swifter-
than-expected rate reductions. Small-cap stocks would likely be the biggest outperformers in a
“Goldilocks” scenario of robust US growth, falling US inflation,
and preemptive US rate cuts.

House view
Did you know?
01 Small-cap stocks have lagged in recent years.

• In terms of valuations, the Russell 2000 is trading at a

• The Russell 2000 index, an index of US small-cap companies, is up 0.3% so far in
2024 as of 19 February, versus a 4.9% gain for the S&P 500 large-cap index.
• Over the past five years, US small-caps have advanced around 30%, lagging a
roughly 80% gain in the S&P 500.
• In 2023, large-cap tech stocks led the way, with the FANG+ index gaining 96%
compared to a return of 16.9% for the Russell 2000.
roughly 55% discount to the Russell 1000 versus a 10-
year average discount of 32%, while the forward price-
to-earnings ratio for the S&P 600 is also lower than its
10-year average. In the Eurozone, the relative valuations
of small- and mid-caps are even lower than at the trough
during the global financial crisis, suggesting the biggest
discount since the tech bubble in the late 1990s and
early 2000s.

• Since nearly half of the debt held by Russell 2000

But the outlook for smaller companies looks brighter for
02 2024.
companies is floating rate, versus around a tenth for
large-cap companies, Fed rate cuts can quickly start to
reduce interest expenses for small-cap companies.

• Valuations are attractive for small-caps after a long period of underperformance,
both in the US and Eurozone.
• Small-caps are more reliant on floating-rate loans and so stand to gain more from
rate reductions from the Fed and ECB.
• The total value of the Russell 2000 index is just around
USD 3tr and accounts for only 6% of the total US equity
market capitalization.

• The earnings per share growth for small-cap companies looks set to outpace the
broader index this year in the US Investment view
The long-term advantages of a modest allocation to small-caps
are often overlooked, including diversification and a potential
So a modest allocation to this part of the equity market
03 can add value to portfolios, in our view.
boost to returns. In addition, on a tactical basis, small-caps
appear well positioned to outperform as central banks cut
rates.

• While small-caps are generally more cyclical, the segment should perform well in our
base case of a soft landing for the US economy.

• In addition, we believe US and European small-caps, along with Swiss mid-caps,

would be among the main outperformers in a Goldilocks scenario of robust US
growth, falling US inflation, and preemptive US rate cuts.

UBS CIO WM 19 February 2024 5

Can equities rally further from all-time highs?
Key message
The S&P 500 rose to an all-time high in February, helped by resilient US
economic data and the rally in AI-related stocks. Markets are likely to be
choppy amid shifting expectations for central bank policy easing. But we
think lower interest rates, positive economic growth, and growing corporate
earnings should create a supportive backdrop for equities in 2024. In our
base case, we see the S&P 500 ending the year around current levels. We
recommend seeking exposure to quality stocks, including the US IT sector,
which should offer resilient earnings growth.
House view
01 The S&P 500 reached a record high in February.
• The S&P 500 closed above 5,000 for the first time on 9 February.
• Growth data have been resilient, and inflation has been trending lower.
• Enthusiasm for artificial intelligence-related stocks also fueled the rally.
But we think the fundamental backdrop remains
02 supportive for stocks.
• Our base case scenario is for a soft landing, in which economic growth slows but
remains positive, and inflation falls further.
• The Federal Reserve is set to cut interest rates this year, although uncertainty about the
pace and timing of policy easing may keep equity markets choppy in the near term.
• We expect S&P 500 earnings per share growth of 8% in 2024.
We are neutral on equities overall, and see quality stocks
03 as a core holding for investors.
• We expect the S&P 500 to end the year around current levels in our base case.
• Quality companies—with strong balance sheets, high profitability, and exposure
to resilient earnings streams—should be best positioned to deliver performance,
especially if economic growth slows. We like the US IT sector.
• US small-caps, small- and mid-cap stocks in Europe, and emerging market equities
should fare well in our base case, and especially in an upside economic scenario of
robust growth and lower rates.
New this week
The S&P 500 fell 1.4% on 13 February, its worst one-day
performance since March 2023, after US consumer price
inflation data for January came in hotter than expected. But
the index rebounded in subsequent days and closed at a new
all-time high on 15 February.
One liner
Cooling inflation, positive economic growth, and lower interest
rates should create a supportive backdrop for stocks in 2024.
Did you know?
• Historically, record highs have been no barrier to further
stock market gains. Over the past 60 years, in the one-,
two-, and three-year periods following a new all-time
high, S&P 500 returns have averaged 12%, 23%, and
39%, respectively. This is hardly different from the 12%,
25%, and 38% average returns for all other periods over
•
the same time frames.
Companies with “quality” attributes typically have strong
returns on invested capital, resilient operating margins,
and relatively low debt on their balance sheets.
• With around 50% of US small-cap debt floating rate
(versus 10% for large caps), the segment is highly
sensitive to interest rates, and so would be a particular
beneficiary of faster Fed rate cuts.
Investment view
We are neutral on global equities. We like quality stocks,
including the US IT sector. We also see tactical opportunities
in areas that would likely outperform both in our base
case and in an upside economic scenario (e.g., emerging
markets, US small-caps, and small- and mid-caps in Europe
and Switzerland). Our December 2024 target for the S&P 500
is 5,000 in our base case, and 5,300 in an upside economic
scenario.
UBS CIO WM 19 February 2024 6
Is it time to reduce my cash holdings?
Key message
In recent years, rising central bank policy rates have increased the appeal New this week
of cash. But interest rates are set to fall this year, with the Federal Reserve
Chicago Fed President Austan Goolsbee said that slightly higher
removing the tightening bias in the latest FOMC statement. This reduces the
US inflation data for a few months would still be consistent
return of cash and increases reinvestment risks. We believe investors should
with a path back to the Fed’s 2% target, leaving the door to
progressively lock in yields while these are available, and ensure they are
rate cuts this year open.
sufficiently invested and diversified for the long term.

House view One liner

With interest rates likely to fall in 2024, investors should
The rate-hike cycle of 2022 and 2023 increased the
01 appeal of cash deposits for many investors.
reevaluate their cash holdings, progressively lock in yields, and
ensure they are sufficiently invested and diversified.

• In the US, the federal funds rate target range stands at 5.25–5.5%. In the Eurozone,
the deposit rate is 4%. Did you know?
• The European Central Bank, the Federal Reserve, and the Bank of England all left
policy rates unchanged in their first meetings of the year.
• History suggests that peak rates don’t last long. In the 10
instances of Fed rate-hike cycles since 1970, interest rates
stayed at the peak for a median of three months.

02 But such elevated deposit rates may not last very long. • A 60/40 portfolio of US large-cap securities and bonds
beat cash around 80% of the time over a five-year
period, based on data going back to 1926.

• The latest FOMC statement removed the tightening bias as the risks to achieving its • Historically, cash has only outperformed bonds early in
employment and inflation goals are moving into better balance. the hiking cycle—as we saw in 2022—with global bonds

• Our base case is of an economic soft landing in the US, and we see the Fed cutting starting outperforming even before rates peaked.

rates by 100bps this year, likely starting in the second quarter.

• The BoE gave the impression that the door to rate cuts is open, while the overall
tone from the ECB was also softer than in December.
So, investors should re-evaluate their cash holdings, lock
03 in yields, and stay invested and diversified.
• Attractive yields on quality bonds can be locked in, providing the added benefits of
diversification and potential capital gains.
Investment view
We believe investors should limit their overall cash balances
in the year ahead. Interest rates are likely to fall in 2024.
This will reduce the return of cash and increase reinvestment
risks. Beyond cash and money market funds, investors should
diversify their liquidity strategy with a combination of fixed-
term deposits, bond ladders, and structured investment
strategies to cover expected portfolio withdrawals over the next
five years.

• A combination of fixed-term deposits, a bond ladder, and select structured

investment strategies can help investors optimize yields while balancing
counterparty, interest rate, credit, and liquidity risks.

• We believe assets in excess of 2–5 years of expected withdrawals should be invested

in a diversified range of longer-duration financial assets.

UBS CIO WM 19 February 2024 7

Why invest in a balanced portfolio now?
Key message
Equities and bonds rallied in unison in late 2023, though their performance
has diverged in early 2024. We continue to believe that holding a core
position in a balanced portfolio is the most effective way for investors to
preserve and grow wealth over time.
New this week
Chicago Fed President Austan Goolsbee said that, “even if
inflation comes in a bit higher for a few months (as many
forecasts suggest), it would still be consistent” with a path
back toward the US central bank's 2% target. Headline US
consumer price inflation was 3.1% year-over-year in January,
while the core rate—excluding food and energy prices—came
in at 3.9%.

House view
Stocks and bonds rallied together in late 2023, though One liner
01 their performance has diverged in early 2024. We believe that holding a core position in a balanced portfolio
is the most effective way for investors to preserve and grow
wealth over time.
• In the final two months of 2023, a 60/40 portfolio of equities and bonds (MSCI All
Country World in local currency and Bloomberg Global Aggregate indexes) delivered
its third-best two-month return in at least three decades.

• The S&P 500 rallied to a record high in early 2024, but the 10-year US Treasury yield
Did you know?
has risen more than 40 basis points year-to-date (as of 16 February).

• Vanguard research estimates that rebalancing can add

about 14bps to annualized returns (for a 60% stock,

02 We see six merits to getting portfolios in balance today. 40% bond portfolio), as well as reducing the portfolio’s
expected risk.

• Over a 20- to 30-year investment horizon, our capital

• First, we expect positive returns for balanced portfolios in our base case and upside market assumptions imply expected returns for balanced
scenarios for 2024. portfolios of 2.7 to 4.3 times those of cash.

• Second, a balanced, disciplined, and diversified approach can help navigate fast-
changing market narratives.

• Third, market expectations for close to 100 basis points of US rate cuts in 2024 Investment view
increase the reinvestment risks of excess cash and raise the appeal of a balanced
We see opportunities for investors to generate positive returns
approach.
across stocks, bonds, and alternatives in 2024, albeit at
perhaps more modest levels following the recent equity rally.
Diversifying across assets, geographies, and sectors today can
Balanced portfolios can potentially boost returns and
03 lower swings in wealth.
help investors prepare for 2024's challenges and access fast-
changing opportunities in an efficient, risk-controlled way.

• Fourth, balanced portfolios' mix of alternative investments and active management

taps more sources of return than just stocks and bonds.

• Fifth, disciplined rebalancing can help investors navigate more volatile markets.

• Sixth, our capital market assumptions expect balanced portfolios (45% stocks, 35%
bonds, 20% alternatives) to beat cash by around 5 percentage points each year over
the long term.

UBS CIO WM 19 February 2024 8

Should investors look at asset-based finance?
New this month
Key message The International Chamber of Commerce Banking
Commission's Trade Register report recently forecast an annual
Asset-based finance has historically been dominated by institutional investors.
rise in trade and supply chain finance revenue of 3.8% until
Private investors may have been put off by perceived complexity and
2032, with increased digitalization potentially spurring more
memories of the global financial crisis. But we think asset-based finance has a
activity including securitization in this field.
role to play in portfolios as a fresh source of income, potential diversifier, and
a beneficiary of enhanced investor protections. Investors should consider the
risks of this alternative strategy and its role as part of a financial plan.
One liner
House view We think asset-based finance offers fresh opportunities for
income and diversification, subject to careful risk management.

Asset-based finance has historically not been on private

01 investors' radars.
• Private asset-based finance (ABF), an estimated USD 5tr market, involves making less
liquid loans against the cash flows of various assets.
• ABF can be complex and illiquid, given the wide range of assets used as collateral
and the bundling of assets in a process known as securitization.
• Some investors shunned ABF given the role of certain mortgage-backed securities
during the global financial crisis.
Did you know?
• Private ABF has grown as stricter regulation limited
banks' willingness and ability to lend to some borrowers.
• The primary driver of private ABF returns is income. Many
managers pay out income streams of between 4% and
10% per year. Returns primarily come from the interest
and principal payments on the underlying asset classes,
such as loans, leases, receivables or royalties.

But we think ABF has a role to play in long-term • While prime sectors continue to show strength in February

02 portfolios. 2024, delinquencies in non-prime areas have increased,

particularly in the mortgage and auto loan sectors.
However, we note that overall pricing and returns for
• ABF can offer appealing risk-adjusted returns, with average annualized fund this diverse sector should contain default risks for well-
performance ranging from 6% to more than 15% a year. diversified investors.

• These private loans often have more robust investor protections —like stricter
covenants and more collateral—than other forms of fixed income.

• Private ABF can be a portfolio diversifier, with an average long-term return
correlation of 0.48 to US investment-grade debt and 0.58 to private direct lending.
We advocate using active risk management to access this
03 asset class.
Investment view
We like asset-based finance as a potential diversifier and
source of alternative risk-adjusted returns. It should, however,
be noted that managers' performance can differ widely due
to differences in expertise, risk management strategies, asset
selection, and diversification, underlining the importance of
manager selection.

• We think experienced managers are best placed to understand the opportunities and
risks of different underlying assets (from car loans to music royalities).

• Investors should be aware of the risks of private ABF investing, which can include
credit, illiquidity, and prepayment risks.

UBS CIO WM 19 February 2024 9

What's next for sustainable investing in 2024?
Key message
We are positive on the outlook for 2024, with expected rate cuts providing
positive tailwinds alongside persistent structural trends for sustainable
investments. We continue to recommend a portfolio approach, which has
demonstrated a strong track record, and see focused thematic opportunities
in the industrial transition, water, food and agriculture, and sustainable
infrastructure.
House view
Alternative energy equities and related themes had a
01 challenging 2023.
• ESG thematic equities struggled in 2023 as higher rates posed project financing risks,
while offshore wind developers and electric vehicles faced supply chain challenges.
• The MSCI Alternative Energy index fell 25% during the year, compared to a flattish
annual performance by the MSCI World Energy index.
• In the US, the increasing politicization of ESG led to a pullback in sustainable
investing fund flows and sentiment.
But sustainable investing portfolios continued to deliver
02 returns and growth.
• Global ESG leaders equities, representing the bulk of SI strategies in the market,
outperformed the broader market with similar volatility in 2023.
• Total deal value in climate tech venture capital activity achieved a new record, with
deals focusing on recycling, manufacturing, and chemicals.
• Outside the US, sustainable fund flows remained positive, compared to another
shrinking year for overall global funds.
In 2024, investor attention is likely to broaden beyond
03 the energy transition.
• Rate cuts should support a recovery in capital investments, including in sustainability
projects in energy and industry.
• As renewable energy generation capacity continues to expand, we see opportunities
in energy efficiency, automation, and circularity.
• We also see sustainable infrastructure, water scarcity, the future of food, and
agriculture as key investment themes for the year.
New this week
Sustainable bond issuance is forecast to exceed USD 1 tr for
the first time in 2024, according to a recent report from
S&P Financial Services. Reasons cited for growth include faster
efforts to accelerate the net-zero transition, as well as greater
use of green and social bonds from emerging markets.
One liner
Despite volatile headlines, we continue to see strong underlying
momentum for both investments into sustainability, and
sustainable investments overall. Investors should maintain
a diversified portfolio approach to capture top-down and
bottom-up opportunities in SI.
Did you know?
• Sustainable investing includes multiple strategies applying
distinct approaches and can be applied across asset
classes.
• Empirical records support our view that SI can deliver
comparable financial returns, while offering improved
sustainability transparency compared to conventional
investments.
• The G20 projects a USD 15tr infrastructure investment
gap through 2040, creating opportunities across
emerging and developed markets.
• Global renewable energy capacity reached new record
highs, with renewables hitting 50% in European
electricity generation. The US Inflation Reduction Act
generated USD 100bn in new investments in 2023.
Investment view
We favor a portfolio approach to SI, which includes exposure
to both thematic and integrated investment strategies across
fixed income, equity and hedge funds, and where possible ESG
engagement to advocate progress.
UBS CIO WM 19 February 2024 10
How should I invest in tech in 2024?
Key message
The AI race to build and commercialize new capabilities and tools has fired
up tech investment and capital expenditure across industries. We think the
adoption of AI will unlock value across a number of sectors. We also think
large-cap tech shares have more room to run, and we now rate US IT as most
preferred. This partly reflects our bias for quality, with the sector offering a
combination of strong returns, robust balance sheets, and swift earnings
growth, in our view.
House view
The AI application and investment rush has formed a
01 powerful new narrative for tech.
• US tech outperformed in 2023 thanks to strong investor interest in AI-sensitive stocks
and industries.
• We have raised our forecast for annual AI sector revenues to USD 420bn by 2027, or
a 72% compound annual growth rate (CAGR) during 2022–27.
• Near-term catalysts include “copilots” and generative features in office and enterprise
software, and sustained AI infrastructure spending.
But the story doesn't end with AI, with large tech names
02 also offering quality exposure.
• US tech company balance sheets are strong, a positive driver in a period of high interest
rates and slowing economic activity.
• Earnings revisions are improving, adding to confidence that key end-markets have
reached a trough.
• Historically, quality growth stocks tend to perform well during the later stages of the
business cycle.
We thus rate US IT as most preferred, and position for
03 technological disruption across industries.
• 4Q23 earnings results were solid, and we raise our global tech (IT and internet) 2024
EPS growth forecast from 16% y/y growth to 18%.
• Against this backdrop, we maintain our positive view on semiconductors and software.
• With a mixed outlook on margins due to rising investments, we believe tech
giants with superior pricing power and strong margins are relatively well positioned.
New this week
OpenAI announced last week that it has a software program
in the works —called Sora—that can generate videos up
to a minute long based on text prompts. Although OpenAI
cautioned that Sora is still a work-in-progress, the business
potential is nonetheless sizable. Currently, data from company
reports suggests that the video production market—including
TV, streaming, and advertizing—amounts to around USD
800bn and is growing around 5% annually.
One liner
US IT offers quality exposure within a portfolio, in our view,
while technological disruption across industries is creating
compelling opportunities for longer-term portfolio growth
potential.
Did you know?
• The IT segment is the most global of all S&P 500 sectors.
More than 58% of its revenue comes from outside the
US, versus 40% for the index as a whole.
• Disruptive innovation, a term coined by Harvard
University professor Clayton Christensen, refers to
processes in which a product or service takes initial
root in simple applications at the bottom end of a
market before moving up the value chain and eventually
displacing established competitors.
• We expect AI industry revenues to grow from USD 28bn
in 2022 to USD 420bn in 2027, with risks tilted to the
upside.
Investment view
We raised the US information technology sector to most
preferred in 4Q23. Within tech, we think investors should focus
on companies with exposure to disruptive technologies and
those with high growth potential. We like high-margin tech
industries: Software, internet, and semis.
UBS CIO WM 19 February 2024 11
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