UBS Chief Executive Officer Sergio Ermotti warned on Thursday that investors have grown complacent over the past few years despite rising geopolitical and economic risks.
“There has been a certain degree of complacency in the financial markets over the past few years,” Ermotti told CNBC’s Christine Tan, adding that volatility would have been expected to be quite high given the environment.
Although markets have experienced occasional turbulence, strong investment in artificial intelligence, data centers and other new technologies is helping to support economic growth and financial markets, he said.
The head of UBS has warned that investors face an increasingly complex environment due to multiple headwinds. “New problems are being created without addressing or solving old problems.”
Markets face energy and shipping risks from the war between Iran and Ukraine, on top of which the U.S.-China conflict is straining supply chains, while rising borrowing costs and stubborn inflation are a headwind to economic growth.
That uncertainty is causing some of the world’s wealthiest investors to spread their bets more widely rather than making large directional calls, Ermotti said.
Hedging against uncertainty
“It’s very difficult in this environment and it’s not very wise to have too strong a belief,” Ermotti said.
He said UBS’s clients have diversified across sectors and geographies in recent quarters, while continuing to invest in AI and technology.
Still, UBS clients’ overall asset allocations have not changed significantly over the past year, and increased diversification has not led to a wholesale exit from U.S. assets.
Mr. Ermotti said UBS saw some capital flow into global emerging markets about a year ago, but characterizes the flow as investors tapping into excess capital rather than actively reducing existing U.S. dollar or dollar positions.
“It was more about how the surplus cash was used than it was about people backing transactions from the US or the dollar. So I think that story has weakened,” he said, adding that the dollar remains the “base currency.”
Long term fees are high
Ermotti said rising interest rates are also encouraging investors to take a more balanced approach to their portfolios as persistent inflation continues to put pressure on central banks.
UBS’s chief executive said further policy tightening was not surprising as inflation has remained stable and above the central bank’s target over the past year. He expects major central banks, including the European Central Bank, the Federal Reserve and the Bank of Japan, to raise interest rates in the coming months.
“The ECB could start the process of raising interest rates. The Fed will likely follow suit. We certainly expect several rate hikes in the coming months,” Ermotti said.
This means investors should not expect borrowing costs to return quickly to the low levels seen before recent inflationary pressures.
“Inflationary pressures are still there and have not abated, so I think it is reasonable to expect interest rates to rise for some time,” Ermotti said.
