UBS has identified investment opportunities ahead of the Federal Reserve’s next interest rate decision after stronger-than-expected U.S. jobs data boosted expectations of a September rate hike.
The outlook follows August nonfarm payrolls growth of 162,000, well above forecasts of 55,000, while unemployment remained at 4.1%. Following the report, traders raised the probability of a September rate increase to about 60%.
Despite the prospect of higher rates, UBS remains positive on equities and believes any market pullback linked to a Fed hike could present a buying opportunity.
While rising yields may pressure some rate-sensitive sectors, the bank said resilient economic growth, improving earnings, and continued investment in artificial intelligence infrastructure, power demand, and resources should continue supporting stocks.
According to the bank, a Fed rate hike driven by economic strength is generally a more favorable environment for stocks than one prompted by persistent inflation concerns.
UBS also pointed to medium- and long-duration government bonds as an attractive area of the fixed-income market.
The bank warned that further upward repricing of interest rate expectations could limit returns for investors holding short- and medium-term bonds. As a result, it no longer sees locking in yields on those maturities as an appealing alternative to cash.
Instead, UBS believes recent increases in longer-term yields have improved the risk-reward profile of longer-dated bonds by offering stronger income potential and portfolio diversification benefits.
Gold role as a hedge
While equities and longer-dated bonds are UBS’s preferred opportunities ahead of the Fed meeting, the bank continues to view gold as an important portfolio hedge.
Higher real interest rates and a stronger U.S. dollar could pressure gold in the near term. However, UBS believes geopolitical risks, inflation uncertainty, and fiscal concerns should continue supporting the metal’s role as a portfolio hedge.
The bank added that commodities could also help diversify portfolios if inflation reaccelerates or energy markets face disruptions.
With markets increasingly pricing in another Fed rate hike, UBS sees equities and longer-dated bonds as the most attractive opportunities ahead of the central bank’s next decision.
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