Investment strategy on stock and bond markets, asset allocation: UBS GWM

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  • Jason Draho is Head of Asset Allocation Americas for UBS Global Wealth Management.
  • He says the volatility is too high and the liquidity too low for investors to start bargain hunting now.
  • Draho explained how people should play defense as stocks and bonds fall.

UBS Global Wealth Management’s Jason Draho doesn’t mince words when he says it’s a fragile investment environment for just about anything.

With the Federal Reserve raising interest rates and tightening financial conditions to fight inflation, Draho says there are plenty of assets with limited upside potential or plenty of downside in the near future.

“That means they basically want stocks to go down, credit spreads to widen, the dollar to strengthen and interest rates to go up,” he said. “Overall, it’s a negative environment.”

It is also a difficult environment in which to invest safely. Draho, the company’s head of asset allocation in the Americas, warns that stocks and bonds are likely to continue to trade in tandem as investors worry about high inflation. This means that stock and bond prices could continue to fall simultaneously, as they have done in recent months.

The idea behind a traditional stock/bond portfolio is that these two components generally move in opposite directions. If stocks are down due to recession fears, bonds will likely rise as they are considered a very safe investment. But Draho says inflation fears short-circuit that.

The US S&P 500 index has fallen 16% this year, and the Barclays Aggregate Bond Index, a fixed-income benchmark, has fallen nearly 10%. And Draho argues that now is not a good time to step in and hunt for bargains, as limited trading means a day’s decline in the market is more likely to turn into a multi-day rout right now. .

“Liquidity is very low,” he said. “There is not a lot of trading volume. The number of bids and the market price are quite low, so people are just not willing to step in and buy.”

The only place in the market that has been immune so far is in commodities. Prices are high due to high demand and tight supply, and Draho says increasing exposure to commodities is always a good idea as inflation is likely to stay above the 2% target rate of the Federal Reserve for several years. This will help support these high prices.

“You want to steer your portfolios towards asset classes that all tend to benefit from an inflationary environment,” he said.

Draco says that quality and assess equities should continue to outperform as rates remain elevated and the economy matures. In fixed income, he says rising rates are broadly priced in, meaning it makes sense to buy longer duration assets compared to the beginning of the year, when he advised his clients to opt for the short term.

Given that the outlook for stocks and bonds is murky, he says private credit is a particularly attractive option today.

“Private credit is an asset class that we have enjoyed for some time,” he said, adding that the sector is still somewhat risky as a recession could be approaching.

“We don’t have the kind of belief that we had on private credit 6 to 12 months ago,” he said.

The key, he says, is to stay balanced and avoid betting on any specific economic or market outcome at this time, as market volatility and questions about inflation, interest rates and recession mean things could break in a number of different directions.

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