How to Prepare Your Portfolio for Q4 By Investing.com

Investing.com — As we head into the final quarter of 2024, markets are buoyant, with equities hitting new highs, supported by the Federal Reserve’s aggressive rate cuts and hopes of a soft landing for the US economy. Optimism surrounds global stocks, which are on track for a fourth straight quarter of gains, while bonds rallied amid lower inflation and the prospect of more central bank easing.

However, this positive sentiment is tempered by uncertainties and investors need to be prepared for the challenges ahead in the latter part of the year.

UBS analysts pointed to the narrowing window of opportunity for portfolio adjustments as central banks accelerate their rate-cutting cycles.

The Federal Reserve’s unexpected 50 basis point cut marked a strong start to its easing cycle, with expectations for another 50 basis points in 2024 and another 100 basis points next year.

Similarly, the European Central Bank, the Bank of England and the Swiss National Bank will continue to cut rates.

These reductions, while supportive of the stock, are likely to diminish the return on cash. For investors, this makes it less viable to hold excess funds in deposit accounts or money market instruments as cash yields erode in the face of falling interest rates.

In response, UBS recommends reallocating capital to income-generating assets that offer more sustainable returns.

“Strategies such as bond ladders, medium-duration investment-grade bonds and diversified fixed income can help maintain portfolio income,” the analysts said.

These instruments are particularly well suited to replace cash holdings, offering a more sustainable return profile in an era of lower interest rates.

Amidst this changing monetary landscape, the upcoming US election presents another potential source of market volatility.

UBS analysts warn that the outcome of the election could have profound implications for sectors such as US consumer discretionary energy and renewable energy, which are highly sensitive to changes in public policy.

A clean sweep, where one party controls both Congress and the White House, could lead to significant regulatory and fiscal changes, impacting trade tariffs and trade regulations.

For investors, this presents both risks and opportunities, depending on the industries involved.

It is important, however, not to bet too much on a single political outcome. Positioning portfolios to take advantage of a particular election outcome could backfire, especially given how close the race remains.

UBS encourages managing exposure to vulnerable sectors, particularly in the US, while taking into account currency risks such as those related to .

Regardless of who wins the election, the ongoing strategic competition between the US and China is expected to persist, benefiting companies involved in relocating and reducing reliance on overseas manufacturing.

Economic uncertainty, along with geopolitical tensions, could further fuel volatility in capital markets. Despite the Federal Reserve’s upbeat assessment of the US economy – citing strong growth and low recession risks – investors should remain vigilant.

The weak release of economic data, as well as the ongoing conflict in the Middle East, could quickly sour market sentiment. UBS analysts emphasize the importance of portfolio diversification as a shield against these risks. By spreading investments across different asset classes and sectors, investors can better withstand potential market shocks.

The AI ​​sector remains a key theme for long-term growth, and UBS believes that this technological revolution will be a major driver of markets in the coming years. For those with limited exposure to AI, market declines could present an opportunity to increase holdings in this transformative sector.

Conversely, investors who are heavily weighted in AI-related stocks should consider capital preservation strategies to lock in gains and protect against potential downsides.

In the face of uncertainty, alternative investments provide an additional layer of protection and diversification. Hedge funds with low correlations to traditional assets can help mitigate portfolio volatility.

Meanwhile, private equity and infrastructure investments provide exposure to growth opportunities outside of public markets, which may be more resilient to short-term changes.

Private credit, with its attractive yield profile, offers another compelling option for investors seeking income alternatives in a low-interest environment.

However, these asset classes come with risks, including lower liquidity and less transparency, and are only suitable for investors who can tolerate these features.

Gold has also re-emerged as a crucial safe haven amid rising geopolitical tensions and the Fed’s easing cycle. With prices hitting a new all-time high of $2,630/ounce and the metal up about 27% year-to-date, UBS sees more room for gains.

The brokerage expects strong institutional demand to continue supporting gold prices through 2025, potentially pushing them to $2,700/oz. For those looking to hedge against geopolitical risks and inflationary pressures, gold remains a “most preferred” asset in UBS’s strategy. Investors can gain exposure through physical gold, structured products, ETFs or gold mining stocks.

As the Federal Reserve continues to cut rates, UBS analysts say fixed income markets will remain an attractive space for generating stable returns.

Although tactically neutral on fixed income, UBS signals that the broader bond market offers valuable opportunities for income generation in the coming months. Investors can expect up to 100 basis points of further rate cuts in 2024, with another 100 basis points likely in 2025.

This downward rate trajectory will make bonds, especially those of higher credit quality and medium duration, a more attractive option compared to cash or lower-yielding money market instruments.