How should I be positioned? with Richard Bernstein (RBA) and Jason Draho (UBS CIO)

Hi everyone, Dan Cassidy here. Welcome back to How Should I Be Positioned on the UBS Market Moves podcast channel. As you know, on this podcast, we like to catch up with our industry colleagues and partners to discuss the market and macro environment along with thinking when it comes to asset allocation.

Joining us here for today's episode from the UBS Chief Investment Office, glad to welcome back Head of Asset Allocation for the Americas, Jason Draho. Also excited to be joined once again from Richard Bernstein Advisors by Richard Bernstein, the firm's founder, Chief Executive Officer and Chief Investment Officer. So with that, Jason and Rich, thank you both for spending some time with our listeners, our clients today on what is the final episode of How Should I Be Positioned for 2025.

Great to be back with you both. Looking forward to today's conversation. Yeah, thanks for the invitation to speak to all of you.

Rich, I've lost count of how many times you've joined us, so thank you for that. It is much appreciated. I know it's kind of enlightening to think and discuss the markets with you.

Well, thank you. That's nice. Thanks.

So as we're speaking today here on Monday, December 1st, naturally there's a lot of focus attention towards what the outlook is for the year ahead. So to begin, Rich, and perhaps a minute or so, can you provide our listeners with some thoughts around your expectations for the U.S. economy and markets as we head into January of 2026? Right.

So, Dan, I think just to kind of wrap up 2025, I think everybody should agree that the economy from a GDP perspective has been much stronger than people anticipated and even now stronger than people are forecasting, even though we're in early December. I mean, it's kind of funny. The U.S.

GDP is now tracking roughly, take or leave decimal points on this, about 4% right now. I think that's much stronger than economists have been forecasting, and the year as a whole, that's been true. I think what's more interesting, though, has been the speculative nature of the markets throughout 2025.

I think people very often ask is, are we in an AI bubble or something like that, and I think that kind of misses the broader point, and the broader point is that there's a lot of speculation going on in a broad range of markets. Now, in some markets, that speculation may be coming to an end right now as we speak, but I think if you look at the equity market and you look at not only the Max 7, which I think there's nothing wrong with the companies, but there's nothing unique about those companies' growth. There's many companies that are growing as fast, if not faster, but people don't care.

You look at meme stocks, you look at SPACs, you look at historically tight credit spreads in fixed income, you look at what's been going on in cryptocurrencies, you can point at any number of different markets and see this element of speculation that's going on, the use of levered ETFs. I mean, there's just more things you can point to. And I think that's the bigger issue, and I think as we look towards 2026, and we're going to be kind of objective about this, we have to say, well, what drives speculation, and what drives speculation is really liquidity.

Liquidity is the lifeblood of speculation, and so I think, from my personal opinion, I think that if you're looking at 2026 and you're trying to figure out what the tea leaves are going to be, I think you focus squarely on the Fed, because the Fed is either going to be the provider of more liquidity, and then the question would be, where does that liquidity go to, or they're going to be the custodian mopping up liquidity, in which case I think we'll see more volatility than people think. So just to sum up, Dan, I would say that 2026 is going to be, at least for the first half of the year, is going to be all about the Fed, and what's the Fed going to do. Thank you, Rich.

And keeping with the Outlook theme, Jason, I know the UBS Chief Investment Office recently released its year-ahead outlook for 2026, a theme titled Escape Velocity. Can you summarize CIO's thinking when it comes to the year-ahead expectations for the market and macro environment? So I would kind of maybe focus a little bit less on sort of the speculation.

I want to come back to that topic, Rich, with some questions, but just thinking about more like the fundamentals and sort of the comments that Rich made regarding growth this year has been better than expected. I think that's good. I think that's kind of a key kind of part of the narrative that we have for next year.

Like some of these numbers this year have been distorted by like the tariffs and the frontline tariffs pulling growth forward or delaying growth. Maybe now the drag from tariffs is weighing on the economy. Ultimately, I think the bottom line story for next year, at least for the U.S., is – and I think this is broadly applicable globally – is that it's a better macro backdrop next year than this year as, from a tariff perspective, those headwinds for growth and inflation start to alleviate.

So we'd expect kind of growth to accelerate and be a little bit harder next year, inflation to come down, and to agree that the Fed keeps cutting rates. So a macro environment that is conducive to risk assets, you're doing well. How well, obviously, will depend on other factors, including AI, which has been a dominant story this year.

You know, the title escape velocity, question mark, for the year ahead, kind of refers to the idea from a thing like a rocket taking off from ground, like, does it achieve enough speed escape velocity to kind of exit to the Earth's atmosphere and be able to orbit the Earth? Along that same lines, will we get sort of AI achieving sort of escape velocity in terms of how it impacts the economy from the investments that are taking place to the productivity gains, things of that sort? So that's kind of a question that's part of it.

This year, the speculation has certainly been an aspect of the story, raising a lot of questions about the possibility of AI bubbles, things of that sort. So that's kind of how we think about next year. It's a relatively constructive, ultimately, on the fundamentals.

I think there is certainly a risk that the speculation increases even more. But Rich, there's, I guess, a number of different kind of topics I want to kind of build off of. But you mentioned that the Fed is being the story for next year, which I agree.

I think it's, you know, you could argue that some of the volatility in the fourth quarter just reflects the fact that markets have initially became less optimistic about a rate cut in December. And now it's pricing close to 100 percent, as we speak, for a December rate cut. How do you think, I guess, about that likelihood?

How do you think the path going forward for the Fed? Also, you know, just to set context, there's reports that came out just within the past day or so that Kevin Hassett is kind of rumored to be President Trump's nominee to be the next Fed chair. Could that lead to further rate cuts, more sort of more of a dovish tilt?

Because that's really what the president has wanted this year. So when you think about Fed policy going forward from December, but also next year, give us sort of what we know at this point in time. What do you think that actually entails?

Are they going to be providing liquidity, sopping it up? Will they fuel these speculations, or can they actually tamp it down? Right.

So, Jason, you know, as I said, I think that's the key question. I think you're right. Volatility of late has gone hand-in-hand with the probability of the Fed cutting rates going down.

Right? The Fed funds futures markets have been showing that that probability has been decreasing and volatility in the equity market started to go up right away, and volatility in the cryptocurrency market started going up right away. And I think that that kind of addresses the issue that liquidity, as I said before, is the lifeblood of speculation, and I think we saw that.

I think it's an interesting, I find it, you know, politically very understandable, economically more questionable as to this kind of consensus that the Fed needs to cut rates. And what I mean by that is, you know, as I said, GDP is, you know, practically 4% that we're tracking at that right now. You know, inflation, let's say it's roughly 3%, so we've got 7% nominal GDP, more or less.

Take or leave decimal points on that. You know, how can there be a dire need for the Fed to cut rates when nominal GDP is 7%? That doesn't make much sense to me.

So I get the political aspects of this, of course, but I don't understand the economic aspects. And so the question is, what happens if the Fed does start cutting rates, or continues to cut rates, rather, into this kind of 7% nominal growth environment? And that liquidity can go two ways.

One, it could be very healthy, right? And we could see a broadening of lending. We could see a broadening of the stock market.

You know, we could see fundamentals playing a much bigger role in the stock market and sector performance and things like that. That would be very healthy. I don't know who could argue against that.

However, given that we are seeing excess liquidity, there is no hiccup in the financial sector. There is no hiccup in the lending mechanism of the economy that says that the Fed has to cut rates here. And so my question would be, you know, if the Fed does cut rates, does that actually stimulate real economic growth?

I'm skeptical of that. And does it potentially form more speculation, because it's just excess liquidity? Now, one could say, well, who cares?

Rich, you're like, you know, you're worried about money. Who cares? You know, you just don't like the Mag 7, Rich.

So that's why you're all upset about this. And I don't think that fully understands that that reaction fully understands the implications that speculation and bubbles, for that matter, you know, the extreme speculation, are inherently inflationary. And it's one of the ways that excess liquidity turns into inflation.

And you'd say, well, how does that work? Well, what speculation and especially bubbles do is they misallocate, they grossly misallocate capital within the economy. In other words, sectors of the economy that are in dire need of capital go wanting.

But sectors that we don't need capital or are already flooded with capital just get more and more capital. And I think that's a big risk right now, because, you know, as an example, the example I give everybody is imagine if all the capital that have flowed into cryptocurrencies over the past few years instead flowed into the electric grid, investment in the electric grid in the United States, you know, would electricity prices be an issue? No, they wouldn't, because we would have, you know, expanded the electric grid and modernized the electric grid and everything else.

Instead, it's all going into cryptocurrencies. And I think that's an example of how speculation can cause inflation. And so, you know, the Fed is right now, and if they do start cutting rates, they're obviously worried about the implications in the very, very short term, and they're not thinking longer term.

So I think, Jason, there is a very positive outcome that lending could broaden. We could see small caps, you know, have greater access to capital. We could see the stock markets broaden.

That would all be extraordinarily healthy, or we could end up with just more speculation. Which one is going to be, I honestly cannot tell you. So, like, our job is not to, you know, tell the Fed what they should do, although we can have people voice their opinions.

But ultimately, as investors, we have to respond to, like, what they, you know, will likely do. And so, you know, we all have to kind of make, you know, conjectures there. You know, it's easy to criticize the Fed.

I think it's, the situation they're facing right now does feel, you know, complicated. You know, it's probably more complicated than it has been in a while, because when inflation was really high and rates were low, it was sort of obvious you raised rates. You know, you can't say how much they should raise it.

And then once, you know, they got to a certain level and inflation came down, okay, well, now you need to cut rates. The first few 25 basis point cuts, I think that was relatively straightforward. Now it gets trickier, because inflation is still elevated.

On the economy, on the more fundamental side, you know, like the data is telling us that Q3 GDP is tracking close to 4% for the Atlanta Fed. Other estimates are a little bit lower, but still a healthy number. That is sort of back where we're looking now, that we're in December.

For the Fed, you have to focus the labor market. And we've had this kind of puzzle of, you know, the economy where GDP numbers are tracking elevated, you know, and definitely resilient. Consumer spending seems to be resilient.

Labor market, though, is soft. And so, like, there's a bunch of explanations for why that's the case. Ultimately, you could say the Fed needs to be focused on the labor market.

But there's a further complication. We talk, you know, this term of a K-shaped economy, where the upper income households are doing well. They own assets.

Their financial wealth has gone up. The bottom third, quarter, 40% don't own that. They're struggling.

That's a bifurcation. So, on the one hand, if you think of, you could, you know, believe in this view or not, but let's just take it as a starting point. Well, if the Fed is cutting to help the bottom half, it also fuels asset price speculation that would benefit the top half.

That does fuel inflation. So, if I kind of think about, well, what's the Fed's bias? To me, it's still like the net bias is towards a policy that would be accommodative.

So, ultimately, kind of running the economy hot. So, that's how I would lean. I guess, you know, you're saying you're not quite sure, but if you, you know, given all these factors, how would you say, well, I have to ultimately make certain investment decisions.

I think this is going to, you know, lean in that direction, running the economy hot, which also kind of would fuel the, you know, risk assets. Or do you think, you know, the markets believe in that and the real sort of risk is that the Fed sort of disappoints in some way? Right.

I would go with the latter. I think it's going to be more difficult for the Fed to cut rates than people think right now. And so, the volatility we've seen recently may be, you know, the shot across the bow for the financial markets that the Fed can't be as generous as people are currently expecting them to be as we go into 2026.

I think, you know, people always kind of ask me, and I really don't like the question, but people always ask me, what keeps you up at night? And, you know, I think for most investors, I think that should be the issue. You know, will the Fed be able to cut rates as frequently and as generously as is currently expected in the market?

So, I think the answer to that is going to be no. I don't think they're going to be able to do that because I do think that nominal growth will be healthier than people think, and they'll ultimately be constrained by that. Jason, there's another way to think about this, and I think most people really don't understand how the Fed affects the economy.

They think, like, the Fed just lowers rates and everything changes, but that's not really right. I mean, the Fed is the central bank, and the key word there is bank, and the way they affect the economy is through the banking system. So, if the Fed is cutting rates, they are doing so explicitly to lower the cost of funding for the banking system in hope that the banking system will then lend more with that lower cost of funding in hope that additional lending will stimulate economic growth and create jobs, and people forget that.

The Fed lowering rates doesn't do anything. It's a question of the banking system and financial intermediaries, and so the question that we've asked is, where is the hiccup in the financial sector right now that is prohibiting lending, that is stymieing economic growth and employment? And the answer to that right now is it doesn't exist.

Liquidity conditions are hugely abundant. I mean, is any private debt firm having trouble raising capital? No.

Are credit spreads wide? No. Are valuations in the stock market conservative?

No. There's nothing stymieing capital formation in the economy, and so the question that we've asked is, if the Fed does lower rates, why do they believe that that will stimulate employment? Because the banking system isn't having any trouble, so to me, it's something that the Fed is under pressure to do, and I understand those pressures, and I'm not belittling them, and no president has ever asked for higher rates.

I mean, this is nothing unusual, but I don't think it's going to have the effect that people want it to have, and so I think the Fed ultimately is going to be disappointing relative to people's expectations. About a month and a half ago, kind of mid-October, I was having a conversation with another investor, and kind of asked him a question. Leading up until that kind of year-end, the possibility of the markets kind of having a rally year-end to year-end, that's the seasonal pattern, and you can't see November, December are good times.

In discussing both the Fed and the influence of the Fed, but also AI, and my question to him was, ultimately, do you think what would matter more for the markets in terms of the year-end rally materializing, not materializing, is it ultimately the Fed and the Fed being diverse and cutting, or is it more like what happens with AI, the CapEx store, these companies reporting results, and alleviating these concerns that have been lingering for the past year, year and a half, about all the investment, and will it be monetized? And he kind of paused for a few seconds and thought about it, and he's like, ultimately, I think it's the Fed. Now, if we look at the past month of price action, we already discussed how things kind of sold off as the markets' expectations for a December cut went down, and as they've reversed, you've seen the markets kind of bounce back.

I think if I were to ask you the question, just based on what you've said thus far, I'd be like, you'd probably agree that it's the Fed as well. If you have a different take, I'm happy to listen to it. But I'll assume that you're going to say the Fed, which then it's like, okay, but then what about AI?

That's been the story. How do you then think of this other dynamic as Fed cutting rates, perhaps when the economy doesn't really require it, that could fuel the speculation that's taking place across the board, but even further in AI? But ultimately, there is sort of the fundamental question of all this investment that's taking place, will it get a sufficient return on capital?

What kind of economic implications it will have in terms of productivity, labor force growth, things of that sort. So how do you think about AI right now as both a driver of the markets, of speculation, of kind of an aspect of the economic conditions? And then what does it mean as an investor?

How do you sort of navigate that dynamic? So Jason, I'm going to answer that question a little bit tongue-in-cheek, okay? I mean, I'm just putting this out there as something for people to munch on, not necessarily a core belief on my part.

But I think the interesting thing is if the Fed does cut rates and if that liquidity spurs more speculation and we get a bigger building of AI and AI spreads through the economy more rapidly, which I think goes along with speculation that the adoption becomes faster, the Fed may be cutting rates and may increase unemployment, right? Let's take the AI story, that it's going to improve productivity and it's going to replace jobs and everything else. So the Fed cuts rates.

They stimulate more speculative activity. AI gets spread through the economy more rapidly because of all that speculation and cheap cost of capital and over-adequate funding. You can see the Fed cutting rates ultimately to destroy jobs.

I mean, that's not a core belief on my part, but certainly nobody's out there talking about it. Everybody says AI is going to be this huge productivity enhancer. Yeah, maybe, maybe not.

I'm a little bit skeptical about that, to be frank. But it's kind of an interesting thing for people to munch on, to think about that dynamic. You know, people want AI or investors, a lot of investors want AI to be adopted more quickly because of the productivity story.

Well, that will happen much more quickly if the Fed keeps cutting rates and or could happen more quickly if the Fed keeps cutting rates. But then again, you'll lose jobs. So you can have the oddity that the Fed would cut rates and it wouldn't create jobs, it would destroy jobs.

I'm just throwing that out there for fun. That's not, as I said, that's not a core belief, but I think it's kind of a, it's not an impossible dynamic by any means. But I think to seriously answer your question, I think AI is a very important economic story and I think it has been overplayed as an investment story.

I just think there's too much capital flowing to AI to keep these companies growing at the rate that the analysts believe they're going to grow at. I just don't, I just, this happens every time with new technologies, it's nothing new. You overcapitalize a sector, it spreads through the economy more rapidly, but ultimately profitability is the cost.

And you're seeing that where you're getting more and more competition, you're getting more and more competition with AI models, you're getting more and more competition with semiconductors, you know, capitalism does work. And when you have a free cost of capital and basically a zero hurdle rate in the economy, you spur more and more competition. And I think that's happening.

And so I think ultimately the investment story is going to be very disappointing. And, you know, people say, well, has this ever happened before? And it certainly happened with the tech bubble in 99-2000, where if you bought NASDAQ at the peak of the bubble in March of 2000, it took you 14 years just to break even on that.

But yet the internet spread through the economy and changed the economy very meaningfully in those 14 years. So the economic story came true, the investment story turned out to be quite disappointing. And I actually think that's a reasonable expectation of what we're seeing right now, that AI will spread through the economy and change the economy.

I don't doubt that for a second. But I do think the investment story is going to be very disappointing. That's an interesting point.

I want to go back to your first point, though, regarding the Fed cutting rates that actually fuels unemployment. And thinking more about the causality, like what's sort of like your maybe chicken and egg, what comes first or second? Because I've heard sort of this argument sort of being made, more just in general, that you can actually have a situation where the economy is doing okay and AI has been adopted, which leads to unemployment and actually forces the Fed to cut rates.

And so it's a little bit, or because the unemployment goes up, that the economy doesn't need it because growth is good, productivity is good, but unemployment is going higher and the Fed's mandate is not growth, it's unemployment and price stability. So you get this perverse situation where it's probably suboptimal for the Fed to be cutting the situation, but because it has to focus on the labor market, it has to do something that's a little bit like, you could say, you're truly pushing on a string, right? So you're trying to spur growth.

It's a structural change that's causing labor markets to weaken. But if I understand what you're saying, it's that by the Fed cutting, it further fuels certainly speculation in AI. Where I'm struggling a little bit to understand the logic is how does that accelerate the adoption that would then lead to further layoffs?

That would then kind of cycle into the Fed going and having to cut more. Right, right. Well, let me reiterate.

I was saying it a little bit tongue-in-cheek because it's not a core belief, but the logic would simply be that the speculation causes more and more competition, which means the cost of adopting AI goes down, which would mean that it would spread through the economy more rapidly. That was really what I was saying, that when you have a hurdle rate that's zero, you invite all kinds of competition. And I don't think that is factored into analyst expectations of future growth for a lot of these AI companies.

Future profitability. I'm sorry. We want to differentiate between sales growth and profitability.

Well, I guess there's a kind of an argument that is made, which I think is probably where I'd lean at. Ultimately, you're spending all this money on developing models, testing them, running the inferences later on, that in order to monetize it, it's probably not by increasing revenue. It's probably you've got to reduce costs.

So it's disinflationary, ultimately, to some extent, at least for certain prices. So I understand the logic you're saying where, to me, it's more like the timing question and just thinking, you know, what's the outlook for 2026? I'd be really impressed if the companies on mask within the next 12 months adopt AI that would lead to a notable increase in unemployment.

If you said over the next three years, I would sort of buy it. I'm just on a horizon. We're talking about the Fed cutting rates between now and next June.

I'm skeptical that AI could be deployed that quickly. That would cause- Oh, I agree. I agree with you 100%.

As I said, I was saying it a little bit tongue in cheek. But it's an important kind of framework to think about. When I think of AI in general, there's the sequencing and the creative destruction process.

For the economy, the amount of investment that has to take place to build data centers could be a trillion plus dollars over the next two or three years. That's a cyclical boost to growth. Then the structural, secular loss of jobs, productivity gain, that materializes later.

And depending on how the sequencing plays out, maybe new jobs are created almost as fast as jobs related that are displaced. So now I think we're- It's really like the outlook you have or someone to want to take right now on this whole development from AI and the macroeconomy. It's almost, well, how will this play out in sequencing?

I think all these directions are reasonable to say. Some jobs will be lost. There'll be productivity gains of certain magnitudes.

There's investment that takes place for multiple years for this to happen. But what comes first or after? And then the Fed playing a role in all this could either amplify or tamp it down, which to me for the time being, this is all relatively constructive for the markets.

I would then worry like once, but if you feel bubbles, I mean, by definition, a bubble means it has to burst at some point. So how about that happens? I would say, Jason, I don't think if the bubbles burst that that's necessarily bad for the broader market.

I think that we know that we've had the narrowest leadership the last three years. In fact, so far, year to date by our reckoning, year to date, 2025 has been the narrowest year in the stock market, U.S. stock market, since 1998. And so if you think about 98, 99, the decade after was a terrible decade for the S&P 500.

The S&P 500 gave you a negative return compounded for 10 years. But if you were not in that tech sector and you were diversified, you actually did very well. Energy did very well.

Emerging markets did very well. Small caps did pretty well. There were lots of things to invest in over that time period.

So I think we're looking at another period because of this narrow leadership where your basic index fund investor, if you're buying an S&P index fund right now, I think you're going to be very disappointed over the next 5 to 10 years. If you're in a well-diversified equity portfolio that isn't loaded up on 7 or 20 stocks, I think you're going to do just fine. Given that backdrop and what we discussed in terms of uncertainty exactly what the Fed will do, although we can conjecture, but we don't know for sure.

Same thing with all these AI investments, developments, applications for the economy. Still a conjecture more than anything else. In your point about on a multi-year horizon, yes, the overall index level may not do well because it's heavily constrained and stuff is extensive.

But we also have to make decisions on how to invest in portfolios for the next 6 to 12 months. Do you think I will take this perspective and move away from large caps? Do you think that, well, for the time being, and the constraints, you don't want to limit them entirely, give them a track, things of that sort.

Or do you think this is going to continue to go, at some point it's going to reverse, but for the time being I have to ride the coattails? It's like when Warren Buffett famously in 1997 was calling it a bubble. It was for a lot of people, they kind of went the other direction.

It was just too painful for too long and they had to capitulate. So I guess given balancing long-term versus the reality of this could also go, continue on for another year or two. How are you thinking about then allocating across a multi-asset portfolio and maybe even just starting with the equities and U.S. equities, given that you're at the center?

So a couple of themes are running through our portfolios right now. Number one, on the equity side, we have kind of two themes that are in our portfolios right now. And they're basically the common thread in all this is like boring is good.

That's kind of the theme. So on the equity side, the two themes are dividends and quality. And dividends because I think when you get more speculative periods, people forget all about dividends.

But dividends are one of the – compounding of dividends is one of the easiest ways to build wealth through time and people forget about it. And I just think right now people have forgotten about dividends and I think dividends are pretty cheap. And so theme number one would be don't forget dividends.

And that's a big weight in our portfolio is dividend-oriented stocks. The second is non-U.S. developed market quality. These companies are – well, here's the way I like to think about it.

Maybe I've said this before, but I think there's an extra element now, that if you could buy a Maserati for the price of a Volkswagen or you could get Manolo Polonic shoes for the price of Steve Madden's, I think everybody listening to this would say, Rich, I don't know how you're doing that, but I'll take two, please. Because we all understand the relationship between value and growth except when we get to the stock market. And we all do a cost-benefit analysis except when we get to the stock market.

And right now non-U.S. developed market quality has an earnings growth rate that is superior to that of the MAG 7. I'll repeat that. Non-U.S. quality has a growth rate that is superior to that of the MAG 7.

It's got a dividend yield that's roughly five to ten times, depending on how you measure it, higher than the MAG 7 and sells for 30% to 50% less. And if this were anything else in the world, we'd be going like, Rich, I don't know how you do it, but I'll take two, please. Nobody wants to look at these companies.

And I just think they're sitting there, they're growing faster, they have a superior dividend yield, and they're cheap. And nobody cares. Now when I say that, everybody goes, oh, but people have been talking about non-U.S. forever.

Well, that's kind of true, but they did based solely on valuation. Now my point about talking about it's got a growth rate faster than the MAG 7, there's actually a growth rate story now involved in non-U.S. quality, developed market quality. So they're faster growers, higher dividend payers, and they're cheap.

I think that's a pretty good combination. So on the equity side, Jason, those are our two themes. On the fixed income side, I think we're RBA.

Yeah, go ahead, go ahead. Just sticking with the equity theme, and the ex-U.S. international piece of it, are you very much focused on kind of the style or factors in terms of what you're trying to capture? Does it have kind of a regional bias, like if you'd favor developed markets in general versus emerging markets?

Is it Asia versus Europe? Is there some other kind of geographic bend to this? So what we're looking at is developed market, developed market, high-quality companies.

That universe is probably, I'm going to say, about 60% or 65% Europe and maybe about 35% to 40% Asia, I would say. Maybe throw in a little Canada and Australia into that, not to ignore those regions. But that's basically, it's very Euro-centric.

It's going to be about almost 60% to 65% Europe in the ETFs that we look at there. So in terms of other things, to us it's a real mix of growth and value. It's not just growth because even though they're fast growers, they have dividend yields and they're cheap and things like that.

So it's a mix of growth and value. It's not pure value. It's not pure growth.

The size is going to be larger rather than smaller. Okay. Now look, Jason, I just want to emphasize to everybody, if you think Europe, not you meaning Jason, if one thinks that Europe is going to be the place to invest and you're completely certain of that, you'd actually want to buy low-quality European stocks because low-quality European stocks have all this operating leverage and financial leverage that will be huge fill-ups to performance if Europe turns out to be the big place for growth as we go through 2026 and 2027.

I have to admit, we're not completely confident of that. So that's why we're playing kind of higher-quality stocks. So it's a little bit of, you know, sometimes the old saying used to be you play chicken cyclicals, but we're kind of playing chicken non-US.

That's kind of what we're doing. It's kind of putting a toe in the pool but not diving in. And then you're about to mention what you like in fixed income or what you see in fixed income as an opportunity.

So fixed income, I think if there's one place that RBA, Richard Bernstein Advisors RBA, is dramatically out of consensus, it is our fixed income portfolios right now have no credit risk whatsoever. You go back a year ago, we had a lot of credit risk. Two years ago, tons of credit risk.

Right now we have zero, no corporate credit risk in the portfolio whatsoever. And the reason why is what I said before. The credit spreads are historically narrow.

In fact, if you look at high-yield spreads, high-yield spreads have only been this narrow three times in my career. One was right before the Asian-Russian crisis in the late 1990s. The second was right before the global financial crisis.

And the third was right before the 2022 inflation and Fed hiking scare type thing, in which case all three credit spreads widened pretty dramatically. So I understand credit. I understand the role of credit in a longer-term portfolio.

I was one of the first guys to ever research about low-quality equity and the relation between low-quality equity and low-quality debt and how there's huge advantages to having them in a portfolio. I understand all that. But entry points are very important for a tactical manager like us.

And when credit spreads are historically narrow, probably not a great time to load up on corporate credit. A couple of questions about that. So corporate credit, which we agree with.

We're not going zeroing out corporate credit allocations, but we're leaning more into spread product is in securitized credit, MBS, CMBS, higher quality, because those spreads are more compelling. And we do have mortgage backs in the portfolio. I didn't.

I should have said that. But we do have mortgages. Okay.

And then for the second question, it sort of picks up on your last comment regarding the benefits of having lower-quality fixed income or low-quality equities in a portfolio, like if you think of it as a risk premium exposure. You're not getting paid the risk premium right now. So in effect, are you almost thinking like a barbell approach of like either on equities or you're on U.S. government bonds and you don't want to own the corporate credits in between, because if things are okay, there's upside in equities better than credit.

If things aren't okay, you're not getting paid enough to hold the credit. You've got their own treasuries. It's almost a barbell element.

Exactly. That's basically it. That's basically it.

Then within kind of your treasuries, given all the conversation we have regarding the Fed, what they might or might not do, the inflation risk, is your view that rates, I'm talking like the 10-year specifically, maybe like the curve shape continues to steepen, that the 10-year is more likely to go to 4.5 to 3.5? How are you thinking about the duration aspect of it? Yeah.

So our duration, we basically have benchmark duration in our fixed income. Again, take or leave a decimal point on that, but basically benchmark duration. We're doing that purely through the quality component.

We're not doing it through a maturity component. So we're not going way out on the curve because of reasons you just mentioned. But by getting rid of higher yield debt in there, you're lengthening the duration.

So our bias is to have a longer duration portfolio, but not really a long duration portfolio, but doing it by not having credit and not having the higher coupons. So it's almost an active or implicit choice of, because you're not buying the riskier credit that's short, it lengthens the portfolio at the same time, not wanting to take a lot of long duration because rates go higher. Exactly.

I mean, that's generally kind of how we're thinking about it. I guess, yeah, if you reduce some of the credit exposure, it does reduce the portfolio. But to me, it's just more like we simplify it to buy within Treasuries, more like the belly of the curve of the 5 to 7-year point.

You don't need to take a lot of interest rate risk at these levels because I'd worry that the economy ends up being okay and we run it hot, and therefore the 10-year backs up to 4.5%, before ultimately maybe there's some form of financial repression that pushes rates lower, but things will probably have to get worse before they get better in that regard. Right. Exactly.

Well, I know we've covered a lot of topics in our time period, so I appreciate all your perspectives. Give me a few things to think about regarding the Fed and labor markets and AI and things like that, some of the complications. Great.

Thanks again for the invitation. And with that, we will look forward to continuing with the conversation at some point in 2026, though, Jason Rich, as always, very generous with your time and insights. And thank you once again for capping off the How Should I Be Positioned series for 2025 and for spending some time today with our listeners and clients.

Appreciate it, as always. Great. Thanks.

Thank you, Rich, for joining us. And if we don't speak until next year, happy holidays and good luck in 2026. Yeah.

Thanks. Thanks, guys. Thanks, everybody.

Thank you for tuning in. Be sure to visit UBS.com slash studios to view the entire UBS studios suite of podcast channels, along with our video offerings such as UBS Trending. You can also follow us on Instagram for content highlights at UBS Trending.

UBS Studios is part of the UBS Chief Investment Office within UBS Global Wealth Management. Visit UBS.com slash CIO to view the latest research. UBS Chief Investment Office's investment views are prepared and published by the Global Wealth Management business of UBS AG or its affiliates.

The views and opinions expressed in this material by external guest speakers are those of the author, speaker, and are not those of UBS, its subsidiaries, or affiliates. Accordingly, UBS does not accept any liability over the content of this material or any claims, losses, or damages arising from the use or reliance of all or any part thereof. This material has no regard to the specific investment objectives, financial situation, or particular needs of any specific recipient and is published for informational purposes only.

For a full legal disclaimer applicable to the independent investment views produced by UBS, please visit our website at UBS.com forward slash CIO dash disclaimer.