Macro Monthly Podcast with UBS Asset Management

Hi everyone, Dan Cassidy here. Welcome back to the Macro Monthly podcast series here on the UBS Market Moves podcast channel with UBS Asset Management. On a monthly basis, we do look forward to hearing from top investment professionals from the UBS Asset Management multi-asset team joining us for this month's update to kick off the series for 2026.

I'm glad to welcome back our speakers, Evan Brown, Portfolio Manager and Head of Multi-Asset Strategy, as well as multi-asset specialist, Fatou Kante. With that, Fatou, Evan, thank you both for dropping by. Happy New Year.

And Fatou, I will pass it over to you to lead this month's conversation with Evan. Welcome back. Thanks, Dan.

Happy New Year to you and all of our listeners. We have a number of exciting topics on the agenda today, including our latest macro views and how we're positioned in our portfolios. So we have a lot of ground to cover, so let's get started here.

Evan, you just published that your January macro monthly called more growth and less heat. Can you walk us through your thoughts on the economic outlook to start the year? Sure.

Thanks, Fatou. And yes, happy to kick off the year back on these podcasts. Yes, more growth, less heat.

So on the growth side, we're seeing a re-acceleration in growth after the government shutdown induced weakness in Q4. We're also just fiscal policy is turning from a headwind to a tailwind. Headwind last year in the sense that, you know, tariffs are a tax and we raise taxes on businesses and consumers with the tariff increase last year.

But now we're getting the tailwind of the One Big Beautiful Bill Act. Financial incomes are going to rise through tax rebates in the first few months of the year. So that we've got some support for growth.

We're also getting fiscal policy support from Germany, Japan. So it's a global story, too. The less heat refers to inflation.

And yeah, I mean, there's still some tariff-related pass-through of price increases and inflation. But outside of the tariffs, we're seeing a lot of downward pressure on inflation, whether it's housing costs, wages, we're seeing China double down on export-led growth, so they're exporting this inflation to the world. And you know, you get this environment now where growth is picking up and inflation pressures are lessening and the Fed's still with an easing bias.

And that's a good environment for risk assets. So currently the market is pricing in just over two rate cuts for all of 2026. From your view, is what's being priced in right now justified?

We think it's justified. We think, you know, I mentioned inflation, right? If inflation, in our view, is more likely to surprise to the downside than the upside over the coming months, then you could get Fed cuts coming, you know, just for inflation reasons.

You know, also the Fed, what's their dual mandate? It's price stability. So that's the inflation side.

And it's full employment. Now, if it was GDP growth, then you'd say the Fed really shouldn't be easing because growth has come in really strong, continues to come in pretty strong, and we expect it to continue to be the case. But the labor market remains soft, and there's a lot of things going on there, and probably some elements of AI leading some companies to slow down hiring and see what they can do with technology.

But we have seen the unemployment rate rising over the last few months, and we'll be watching that. But if you don't get this turnaround in unemployment, then I think the Fed is still going to err on the side of caution and continue to ease. So actually, at this point, I mean, you mentioned two rate cuts or so priced in for 2026, but there actually is not a full rate cut priced for the remainder of Powell's term, the next three meetings going through April.

I think the risks are such that he's much more likely to ease than not, at least once. And so we think the bias is for the Fed doing more rather than less this year. So I think the pricing right now is fair.

So kind of zooming out a bit to a more global lens, I think the start of the year has been eventful with the US's removal of the Venezuelan leader Maduro, to say the least. And I know you mentioned that you expect strong growth this year. So how is this impacting your thinking on the economy and markets in that outlook?

Yeah, and I think that's the question whenever we have any of these geopolitical events is, what does this actually mean for growth, for inflation, for earnings? And we don't see major changes coming as a result of this. Over time, yes, there's likely to be increased oil supply coming out of Venezuela, but that's going to take a lot of investment.

That's going to take confidence in the governance in the area. And so the vast majority of the time when we have geopolitical events, the answer is to do nothing in terms of positioning, because it's just often not the case, even if some event seems impactful. And it is impactful to global citizenry, but it's not necessarily that impactful for growth, inflation, and earnings.

So there's not much to do there. But what I will say is, yes, we have been getting these geopolitical events, and it feels like a little bit more frequently. And I think that speaks to the benefits of holding gold strategically in portfolios.

So you're less reactive when an event happens. But as we saw after the event, gold performed quite well and provides a little bit of a hedge for potential geopolitical events or increased interventionism playing out more frequently. Great.

And let's maybe switch gears here to talk about the team's asset class view. So I'll start off with the most common question we tend to get from investors at the start of every year, which is, what's your outlook on stocks versus bonds in 2026? So we do like both stocks and bonds.

And the common link there is inflation coming down. But we like stocks more than bonds. Just think it continues to be a good economic environment.

Bottom line is that historically, when you have earnings growing and no recession and a central bank that is easing as opposed to a tightening bias, those are good environments for equities. And we see continued earnings growth, not just in the U.S., but we're seeing a real broadening out of earnings growth globally and across the cap structure here in the U.S. So government bonds we see as more of a hedge in case the labor market continues to worsen.

And the Fed, as mentioned, still has plenty of room to ease. But we prefer stocks to bonds at the current time. Okay.

So you prefer stocks. But within equities, what are your preferred markets? We have kept on with emerging markets, Japan and the U.S.

Those are the areas where we're seeing the best earnings growth. Japan, there's kind of these reflationary dynamics under their new PM, Takahichi, but also continued corporate reform going on in the region. Also seeing that corporate reform and a boom in memory in Korea.

And that's a big export there. And so that's helping our long emerging markets trade. And then within emerging markets, we like China tech.

If you think about the U.S., right, the big question for all the megacap tech companies is what's going to be the return on investment from all this CapEx? And what we're seeing in China is a lot less CapEx. They're not trying to build the absolute best model.

They're trying to be more efficient with it. So their CapEx is running at about a fifth of the size of what we're seeing in the U.S. And so that bar for generating return is actually, you know, the bar is lower.

In China. And so could see, you know, continued dynamics in China looking good. More applications and robotics, electric vehicles and the like.

And so we like China tech. One area that we're underway, we remain underway, is Europe. And this is related to China, actually.

Mentioned China doubling down on export-led growth. And as they're moving up the value chain, you know, they are competing with Germany and a lot of European exporters in the same areas and undercutting them on costs. And that's a tricky environment for a lot of European exporters.

So we're seeing less of an inflection higher in earnings growth in Europe than we are seeing in some of these other regions. And from your view, where do the opportunities lie right now within fixed income? Yeah, so we like EM and equities.

We like it in fixed income as well. EM debt in local currency terms. Our bias is that the Fed, as I said, can do more easing.

And we think that'll keep a lid on the dollar. And investors will be looking in the rest of the world for higher interest rates and for EM carry. And that will put upward pressure on emerging market currencies.

And so that's an area of the world that we like. We're also underway investment grade versus high yield. Part of this is just confidence in the economic outlook.

But also it's that in IG, we're seeing this sharp increase in issuance on funding the AI CapEx cycle. And so there's a lot more supply of IG paper there. And we think that can contribute to some spread widening in IG.

And that's something that you don't really see as much in high yield. And kind of circling back here a little bit. I know you mentioned gold earlier as a good geopolitical hedge.

And in December, you reintroduced an overweight to gold and gold miners. So can you talk a bit about that? And just generally speaking to what's your outlook on precious metals for the year?

Yeah, so I would just like emphasize that I would differentiate between our strategic asset allocation, our tactical asset allocation. So we've long had this overweight gold position. And our strategic asset allocation makes sense of the long term position.

I mentioned the hedge against geopolitical shocks. We're also seeing just central banks and investors around the world gradually accumulating the metal and just diversifying their currency exposure. If you can consider gold a currency.

Also a hedge against independence of the Fed risks on that front. But on TAA, we had been overweight for a good part of last year. But we removed this overweight in the fall because gold was becoming a very volatile trading in a way that we're seeing like big retail speculation.

And for risk management considerations, we decided to take a step back. It was not trading quite in line with some of the typical fundamental drivers that we see. So for risk management purposes, we pulled back a little bit.

Since then, we've gotten more data showing central banks actually increasing their purchases through that period. And the metal's been trading more closely in line with our models, linking into the dollar and rates. So we became more comfortable reengaging.

And that's been playing out so far. In general, with the precious metals and silver's been in the headlines, obviously had some big moves there. And we traded that long for a good part of last year.

But for similar reasons, we had removed it. And when you're in an asset and it's starting to do like up 10% one day and down 9%, the next day, it's sometimes good to just take a little bit of a step back and kind of let the retail speculation play out a bit and wait for it to kind of realign a little bit more with fundamentals. So look, we think gold and silver can still do well over the course of this year.

We have a strategic and tactical asset allocation position in gold. But we're holding back from silver as it undergoes this very volatile environment. Evan, thank you for sharing your insights with us today.

And it's definitely clear listening to your thoughts here that we're well positioned to capitalize on the opportunities that 2026 holds. And with that, I want to thank everyone again for listening in and wishing everyone a happy new year. Follow us on Instagram for content highlights at UBS Trending.

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