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 colleagues from UBS Asset Management. Each month we look forward to hearing from top investment professionals from the UBS Management multi-asset team.

Joining us for this month's update, glad to welcome back Evan Brown, portfolio manager and head of multi-asset strategy. We're also joined today by multi-asset specialist Fatou Kante. So with that, Evan and Fatou, thank you for dropping by and for spending some time today with our listeners.

Fatou, let me now pass it over to you to lead today's conversation with Evan. Welcome back. For today's podcast, we'll touch on a couple of themes, including, you know, the state of the global economy, markets, and then we'll close out with how we're positioned in the max portfolios.

So Evan, we're currently in the midst of a government shutdown and that's meant that we haven't received some key economic data. In absence of this data, how are you tracking the U.S. economy? Yeah, thanks.

Thanks, Fatou. And yes, as a macro guy, it is very disappointing not to be getting the official data coming from the government. But I would say the good news is we're getting enough from other sources such that we have a decent idea of where things are tracking.

So you know, we're most focused on the growth side, on the labor market, of course, and we had ADP come out today and showed their private company that attracts job growth and showed a solid rebound there, which is good to see. We also get, even though we don't get the overall initial jobless claims, we get state-level jobless claims and those are showing, you know, contained amount of layoffs. We're also getting data from regional feds and we listen a lot to what corporates are saying.

We just had earnings season. We pay a lot of attention to what they're saying about the macro environment, particularly the banks, and still seeing good spending there. So overall, you know, across all these private or other sources, we're still getting enough to suggest that the economy is showing some resilience.

The labor market is soft, but it's not, you know, unraveling. The consumer is still spending and we did get inflation data a couple of weeks ago, which came out not as bad as feared because rents are coming down, that's offsetting the tariff. So I think we have a reasonably good picture showing an economy that's hanging in.

Great. Last week, the Fed cut rates by another 25 bits. And what was interesting is that further out the yield curve, rates actually rose.

So why was this the case and what are your expectations for the Fed moving forward? Yes. So it's what we call a hawkish cut, you know, the Fed did cut rates, but the messaging around it that we got from Chair Powell in his press conference was, you know, a little bit more hawkish or perhaps less dovish is the way I would put it.

It showed that a December cut is not a done deal and the market had been pricing it as such. And essentially, the chair was saying that we have a broad committee with a wide range of views. And since the Fed meeting, we've had a number of members come out and say, you know, they're not they're not so sure about further easing because inflation is still above target.

And our view on this is that while there is some hesitation on the committee to be easing more, the Fed in general is still viewing itself rates right now in restrictive territory. And I think they're unlikely to get enough data, giving them kind of the all clear on the labor market such that they'll feel comfortable skipping a meeting in December. So we do think that it's likely that the Fed cuts again in December and likely one more time at the start of next year.

So we've seen rates rise a bit, but it's not something that we're overly concerned about. Great. And, you know, in line with the resilient macro backdrop that in the U.S. that you just described in the November macro monthly, you know, you wrote a piece called The Key to This Cycle's Resilience.

So what is actually behind this economic resilience and what's going to keep this trend going? So we yeah, we wrote that piece, The Key to Private Sector or Key to Cycle's Resilience. And the answer is, you know, what that key is, is just how robust private sector balance sheets are.

So I have to remember that the households, since the great financial crisis, be levered a ton over the ensuing years, such that overall household leverage is quite low. Same thing for the corporate sector and same thing really for the banking sector. And that's been what has enabled us, even as we've had various shocks over the course of this cycle, whether it was the Fed having to hike rates 525 basis points in a short period or Liberation Day.

And then the fact that we're getting tariff levels that are getting pretty close to what Liberation Day announcement was, all in the consumer and businesses have been able to hang in there. And that's because no one's out over their skis, or I shouldn't say no one. I mean, there's certainly pockets of excess.

But on a big macro level, there's no significant need to retrench, whether it's consumer spending or on the on the CapEx side. And so that's something that we think is underappreciated this cycle. I mean, there's clearly a lot of focus on public debt.

That's the flip side of this, you know, government debt is very high, and we addressed that in the piece as well. But in terms of what matters most right now, it's really that strength of private sector balance sheets that we think has been core to the economy's resilience over the course of this cycle. Kind of turning to markets here, I mean, AI this year has really driven returns.

And because of that, there's been, you know, increasing talk emerging about a potential AI bubble. How are you thinking about this risk? Yeah, so I think it's something to take seriously.

You know, it's hard to have a binary call of, oh, we're in a bubble, we're not in a bubble. If you compare it to the dot com, you know, if we're in a bubble, we're not nearly as inflated as we were back then, where you had companies where valuations were just completely detached from reality, the valuations of the big companies, the big tech companies that are, you know, linked to AI, the valuations are rich, but they're not crazy. And the reason they're not crazy is because these companies still have incredible earnings growth.

And that's something that you didn't see in dot com. So, you know, we're not overly concerned about this, like, big detachment from reality for the big companies, even though, you know, there are some retail favorites that look a little bit detached from reality, but that's not a major concern, you know, in a broad market sense. I think something, though, that we need to keep in mind is just the scale of investment in data centers that's being done.

And there are questions to be raised about what will be the ultimate return on all this investment, return on the CapEx boom. And the reality is no one really knows. No one knows just how much AI is going to, it's just how transformational it's going to be in terms of productivity and the like.

So I think what this speaks to is being diversified. I mean, if you just own passive, right, if you just own the S&P 500, now the top 10 companies are more than make up more than 40% of the index. So really passive is an active bet, right?

You're making that a big active bet on those companies. And I think, you know, that speaks to being more diversified within the market, having active stock picking that is not necessarily, you know, all in on these companies where the return on investment is kind of unknown at this point and just not having all your eggs in one basket. And I think another interesting theme this year has been kind of the emerging of some interesting catalysts globally.

And back in October, you had published a macro monthly titled Asia Reform, Innovation and Room to Run. And I think that was a really timely piece, given how dynamic that month turned out to be across the region. And we saw markets in Japan and Korea rally impressively.

So with that momentum in mind, do you still see room for further upside in Asian equities? Yeah, I mean, the timing of that piece was was a little lucky. I certainly didn't know that Korea's KOSPI index was going to surge 25% in a month and stand to Nikkei up 15%.

I mean, a lot of things were falling into place at the same time. They're both levered to the tech cycle and semiconductors. And we've seen really a boom there and just really strong earnings growth.

Also, both locking in and trade deals in Japan, we have a new prime minister, Takahichi, who looks to be pretty growth friendly. That's her coalition that she's built is likely to move reforms forward, which is good news on Japan. So all that's helping.

But this is not just a short term story. I think these are long term stories in that Japan and Korea, there's in both countries a big regulatory push towards moving the corporate sector in a more shareholder friendly direction. There's really positive corporate reform in both Japan and Korea.

And that's what we highlighted in the piece. And that's why, despite some really significant gains, we actually still see room to run here for those companies. Evan, thank you for coming on and sharing your insights with us.

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