Macro Monthly Podcast with UBS Asset Management

I am pleased to welcome back to the show, our UBS Asset Management Monthly Macro Podcast. Today, I am pleased to welcome our speakers, Nicole Goldberger, Portfolio Manager and Head of Global Multi-Asset Portfolio Management, Evan Brown, Portfolio Manager and Head of Multi-Asset Strategy, and Fatou Kante, Multi-Asset Specialist. Fatou, with that brief introduction, I'll pass it over to you.

Thank you, Siobhan. Welcome, everyone, to today's call. For today's call, we're going to dive into the big macro theme shaping the market, the latest headlines, and then we'll close out with our asset class views.

So, Evan, starting with you, after the longest government shutdown in history, the government recently reopened, and we've seen fresh data come through. So, what's your read on the U.S. economy right now, and where do you kind of see growth and inflation risk skewed heading into next year? Sure.

Thanks, Fatou. So, yes, the data are finally trickling in, and look, I think the underlying story is still one of resilience, given the policy shocks that we had earlier in the year on tariffs, the government shutdown. We'll still describe it as there's kind of three economies right now.

You've got AI CapEx, which is booming. You've got the housing market, which is essentially in recession, and then in between, you have the consumer, which is hanging in pretty well, all said and done, and we do have a labor market that continues to cool. The unemployment rate is rising, but it's not unraveling.

We're not seeing a spike in layoffs. So, that's what's keeping the Fed on an easing track. Going into next year, just looking at consensus economist forecast, so the consensus for the U.S. economy is real GDP at 2%, and then inflation remaining at sticky high around 3%, and I think we'd actually, we think the risk to growth are skewed to the upside and the risk to inflation skewed to the downside, and a major reason for this is political in nature.

I think we're all aware that probably voter number one issue, number two issue, and number three issue is affordability, and you can see the administration, Trump administration start to back off on tariffs on groceries, they've been lowering tariffs on China. We think that continues such that the effective tariff rate actually comes down, and what that means is inflation isn't as high, and that also puts more money in the consumer's pocket and supports growth. Also, going into next year, we're going to have the fiscal stimulus that was legislated earlier this year, and the one big beautiful bill act, tax rebates are going to start going into consumers while it's in the spring, so all in, we think actually the growth inflation mix could look pretty good relative to consensus, and that sets us up well for 26.

Evan, you mentioned that inflation risks are skewed to the downside in large part to political motivations of the administration, and what was interesting is that in the last FOMC minutes, there was actually some divergence among Fed officials on inflation versus labor market risk, so how do you think they're interpreting the recent macro releases, and what's your call on the Fed's meeting next week? Yeah, so we've had a lot of local members of the Fed speaking out on both sides. I mean, there's frustration among the hawks, right, because the Fed's missed its inflation target five years in a row now, and they're concerned about the Fed's credibility on inflation, but then you have the doves who are looking at the unemployment rate and seeing that continue to rise and concerned about this kind of softness in the labor market morphing into something more concerning, and so a lot of speeches coming from Fed members on both sides, but it looks like the doves have won out for December.

It looks very likely that the Fed will be cutting maybe around this time next week, so we could get kind of a hawkish cut in the sense that the Fed cuts rates, but as a compromise to the hawks, there's little indication from Chair Powell or from the forecast that the Fed will be easing any time soon, but our bias is that as we head into next year, that the labor market data won't be in the clear yet. The fact that one of the biggest drivers of the economy is this AI capex, which is not necessarily really a big driver of employment, and AI over the long term may be a headwind to employment, as much as we see the economy hanging in fine, it might take some time to really see a re-acceleration in the labor market, and so with the labor market continuing to kind of remain soft, and if we're right, that inflation kind of continues to surprise to the downside, which is what it's been doing and what we think kind of will continue with just shelter prices coming down, wages coming down, and then what I mentioned on the tariffs not being as bad as feared, that the Fed is more likely to have another few cuts coming, and finally, we know we're going to get a new Fed chair starting by the June meeting, and that'll be announced by the Trump administration in January, and that individual is likely to take a more dovish view, so our bias is, even if the Fed sounds hawkish next week, that their bias is going to be towards more easing in 2026. Well, speaking of AI capex, which you mentioned a bit earlier, it wouldn't be right if we didn't mention the AI theme in general on our last call of the year, seeing as though it's kind of been a main driver of market returns, and last month, we saw volatility spike as investors kind of debated whether AI-related capex will end up delivering strong returns, and so how should multi-asset investors kind of think about this theme?

Yeah, so I mean, this is the trillion-dollar question, right, is whether all this spending, all these data center build-outs will end up being monetizable by the large MediCap tech companies that are doing this investment, and all of us are making educated guesses, no one knows for sure, but I think what the market's doing is actually very healthy in the sense that you've seen one or two companies that have had outsized capex plans actually get punished by the stock market over concerns that they're overinvesting, and on the other hand, you're seeing some companies with new, better models come out, them getting rewarded, and I think this is, as much as everyone talks about an AI bubble, a bubble happens when everyone's just throwing money at a theme with no regard to the underlying fundamentals, but the thing is investors are asking these hard questions and are increasingly voting with their feet in kind of pricing the expected returns on investment as we speak on a day-to-day basis, and I think that's, A, that's a healthy thing in the sense that it shows investors are not engaging in full-on bubble behavior, B, it's kind of like if you think of the term bond market vigilantes, people who sell a country's bonds because they don't think that the country is being fiscally responsible, well, maybe this is something like the stock market vigilantes where they're punishing companies that they think are overstretching. That's healthy if it then leads to more careful behavior by those companies, and then the last thing is just from an active management perspective, this is going to create a lot more opportunity. We've seen the correlation of the five main hyperscalers.

It was at 80% in June, so essentially all these companies, their stock prices all moving together. That's dropped down to 20%, so the market is really trying to, in real time, gauge the relative winners and losers and active managers are doing the same, and I think that's going to make this market, which has been quite narrow over the last three years since ChatGPT was released, it's going to be, I think, a lot more dynamic and create a lot of opportunity, not for active management. That was very helpful, Evan.

Thank you. Nicole, always great having you on. I think what I'd like to discuss is kind of your views on equities and given the current macro backdrop that Evan just walked us through, what's your view on the asset class overall?

Thanks, Fatoum. We maintain a positive view on global equities given our constructive outlook, as Evan described. Earnings globally are showing impressive breadth and strength.

At the same time, we expect more rate cuts in 2026, and you combine that with robust corporate and household balance sheets, and that's really fueling our pro-cyclical stance. We're leaning into risk assets, which means we are overweight equities and underweight bonds in our multi-asset portfolios. Within equities, we are favoring regions where we expect the strongest earnings growth, so we're overweight the U.S., emerging markets, and Japan.

On the other hand, we are underweight broad international developed equities, where earnings are weaker, especially in Europe and Australia. The U.S. and emerging markets also stand to benefit from our weaker U.S. dollar outlook, and in Japan, ongoing corporate reforms are truly transforming the landscape there. We're finally moved from decades of depletion and virtually no growth in Japan to now seeing reflationary dynamics taking hold.

Companies are increasingly focused on boosting capital efficiency and return on equity, which should be tailwinds for a supportive earnings backdrop in Japan. From a thematic perspective, we're excited about the potential of China AI, not just for alpha driven by stronger earnings growth expectations, but also for diversification benefits. You just heard from Evan, we find the AI theme attractive in the U.S., and also more globally.

China, when you think about China AI and China tech, we see this as offering a more nuanced and more idiosyncratic way to access this powerful AI trend, with really more attractive valuations when you compare it to the U.S. Any updates on your fixed income views? So on the fixed income side, at the end of October, we upgraded our view on U.S. high yield.

Thank you, Nicole, and thanks to the both of you for your insights today. And we want to wish you all a strong end to your year and a happy holiday season. And we look forward to reconnecting with you all here in 2026.

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