UBS’s investing and allocation recommendations for the near term volatility

UBS analysts expect stocks to trade higher over the next six to 12 months, but said they would not rule out more volatility in the near term.

Yesterday, U.S. equities fell, and bonds rallied after the ISM Manufacturing Index showed ongoing weakness in the industrial sector, edging up to 47.2 in August, but still missing consensus estimates. New orders also fell to 44.6 from 47.4 – its lowest reading since May 2023.

The S&P 500 (SP500) dropped 2.1%, the Nasdaq Composite (COMP:IND) dropped 3.3%. Nvidia (NVDA) alone fell 9.5%.

But Mark Haefele, Global Wealth Management CIO at UBS, said in a note that investors should keep a long-term perspective, and gave a few investment recommendations:

Investors should keep both “shopping” and “disposal” lists to build exposure at more favorable prices when volatility arises, he said.

They also should examine their AI (AIEQ), (ARTY), (IGPT) exposure within technology (XLK).

“We think current volatility may say more about positioning and expectations than about a new fundamental development for the AI trend,” he wrote. “Those with low AI holdings should consider building exposure through structured strategies to navigate potential volatility ahead. For those with higher allocations, capital preservation strategies could serve as a hedge.”

Haefele also said he expects the Federal Reserve to cut interest rates at each of its three meetings for the remainder of the year, and said investors should consider diversified fixed income and equity income strategies as alternatives to cash.

A diversified portfolio across asset classes, regions, and sectors – including alternative assets such as gold (GLD), (GOLDX) – should be maintained, he added.

“Periods of elevated volatility have historically created favorable conditions for select hedge funds to stabilize portfolios and generate strong returns, especially when other asset classes struggle.”