According to UBS strategists in their Global Economics & Markets Outlook report for 2024–2025, the widely held belief that lower interest rates may benefit equities might not hold true. The report suggests that the US 10-year bond yield (US10Y) is anticipated to decrease by approximately 100 basis points following potential interest rate cuts by the Federal Reserve. However, UBS warns that the cost of equity for firms could increase due to a rise in risk premia, despite the anticipated decline in bond yields.
UBS strategists attribute this phenomenon to an increase in credit spread and the relatively low starting point of enterprise resource planning. Even the technology sector, which is typically sensitive to interest rate fluctuations, has witnessed a surge in valuations, currently aligning with real rates at nearly 250 basis points below current levels, despite rising interest rates. This suggests that the market has already factored in the impact of lower rates on valuations, as stated by UBS.
Highlighting top investment ideas for 2024, UBS recommends the following:
- Long Equal weighted S&P 500 (SPY), compared to the Stoxx 600 (STOXX)
- Long defensives versus cyclicals
- Long Chinese Tech (NQCN9000)
- Long U.S. equity volatility, versus U.S. bond volatility
- Long U.S. Small Cap calls (IWM)
Government Bonds and Credit:
- Long U.S. “steepeners”
- Long U.S. 10-year bond (US10Y), versus 10-year E.U. bond
These insights shed light on UBS’s stance on how lower rates might not necessarily buoy equities and offer valuable guidance for investment decisions in 2024.