Investors should continue to brace for lower interest rates as Fed tapering gets underway: UBS By Investing.com

Investing.com — Investors should continue to brace for lower interest rates as the Federal Reserve begins anticipated rate cuts, according to UBS.

In a note to clients on Tuesday, UBS pointed out that despite equity markets ending August on a high note, ongoing economic uncertainties mean the Fed is poised to ease monetary policy further.

UBS pointed out that the Federal Reserve gave its “clearest signal yet that interest rate cuts are on the way,” with Chairman Jerome Powell recently indicating that “the time has come” for easing.

The expectations follow mixed economic signals, such as a rise in US unemployment to 4.3% in July and a slowdown in consumer price inflation to 2.9% year-on-year. UBS now expects the Fed to cut rates at each of its three remaining meetings in 2024.

The note also addressed the recent volatility in equity markets, which saw a sharp decline in early August due to technical factors such as yen trading and overextended positions in technology stocks.

However, as these factors faded and US economic data showed some resilience, markets recovered, leaving both global and US stocks higher for the month.

The MSCI All Country World Index ended 1.8 percent higher and the index gained 2.4 percent, taking its year-to-date gain to 19.5 percent.

UBS advised investors to remain cautious. “As cash yields erode, we believe investors should consider diversified fixed income and equity strategies as alternatives to cash,” they wrote.

The note also suggests that investors should consider adding exposure to defensive assets such as gold and the Swiss franc to hedge against potential market volatility.

The investment bank explained: “While investors should avoid making large portfolio moves based on the election results, we see the opportunity to review portfolio hedges to consider adding exposure to gold and the Swiss franc – which may provide defensive qualities in times of uncertainty – and to manage portfolio overexposure to election-sensitive sectors and currencies (such as ).”