How to prepare your portfolio for Q4

Investing.com — As we approach the final quarter of 2024, markets are buoyant, with equity indices reaching new highs, bolstered by the Federal Reserve’s aggressive rate cuts and hopes of a soft landing for the US economy. Optimism surrounds global stocks, which are on track for a fourth consecutive quarter of gains, while bonds have rallied amid falling inflation and the prospect of more central bank easing. 

Yet, this positive sentiment is tempered by uncertainties, and investors must be prepared for the challenges that lie ahead in the final stretch of the year.

UBS analysts have emphasized the narrowing window of opportunity for portfolio adjustments as central banks accelerate their rate-cutting cycles. 

The Federal Reserve’s unexpected 50-basis-point cut marked a strong start to its easing cycle, with expectations of a further 50 basis points in 2024 and an additional 100 basis points next year. 

Similarly, the European Central Bank, Bank of England, and Swiss National Bank are expected to continue trimming rates. 

These cuts, while supportive for equities, will likely diminish the returns on cash. For investors, this makes it less viable to hold excess funds in deposit accounts or money market instruments, as cash yields erode in the face of falling interest rates.

In response, UBS advises reallocating capital toward income-generating assets that offer more sustainable returns. 

“Strategies such as bond ladders, medium-duration investment-grade bonds, and diversified fixed income can help maintain portfolio income,” the analysts said.

These instruments are particularly suited to replace cash holdings, providing a more durable yield profile in an era of lower interest rates.

Amid this shifting monetary landscape, the upcoming US election presents another potential source of market volatility. 

UBS analysts caution that the election outcome could have profound implications for sectors such as US consumer discretionary and renewable energy, which are highly sensitive to shifts in public policy. 

A clean sweep, where one party controls both Congress and the White House, could lead to significant regulatory and tax changes, impacting trade tariffs and business regulations. 

For investors, this presents both risks and opportunities, depending on the industries involved.

It’s important, however, not to bet too heavily on one political outcome. Positioning portfolios to profit from a specific electoral result could backfire, especially given how close the race remains. 

UBS encourages managing exposure to vulnerable sectors, particularly in the US, while being mindful of currency risks, such as those tied to the . 

Regardless of who wins the election, the ongoing strategic competition between the US and China is expected to persist, benefiting companies involved in reshoring and reducing reliance on overseas manufacturing.

Economic uncertainty, coupled with geopolitical tensions, could further fuel volatility in the equity markets. Despite the Federal Reserve’s optimistic assessment of the US economy—citing strong growth and low recession risks—investors should remain vigilant. 

Weak economic data releases, as well as the ongoing conflict in the Middle East, could rapidly sour market sentiment. UBS analysts stress the importance of portfolio diversification as a shield against these risks. By spreading investments across various asset classes and sectors, investors can better weather potential market shocks.

The artificial intelligence  sector remains a key theme for long-term growth, and UBS believes this technological revolution will be a major driver of markets in the years ahead. For those with limited exposure to AI, market dips could present an opportunity to increase holdings in this transformative sector. 

Conversely, investors who are heavily weighted in AI-related stocks should consider capital preservation strategies to lock in gains and protect against potential pullbacks.

In the face of uncertainty, alternative investments offer an additional layer of protection and diversification. Hedge funds with low correlations to traditional assets can help mitigate portfolio volatility. 

Meanwhile, private equity and infrastructure investments provide exposure to growth opportunities outside the public markets, which may be more resilient to short-term swings. 

Private credit, with its attractive yield profile, offers another compelling option for investors seeking income alternatives in a low-interest-rate environment. 

However, these asset classes come with risks, including lower liquidity and less transparency, and are only suitable for investors who can tolerate these characteristics.

Gold has also re-emerged as a crucial safe haven amid rising geopolitical tensions and the Fed’s easing cycle. With prices reaching a new all-time high of $2,630/oz, and the metal rallying around 27% year-to-date, UBS sees further room for gains. 

The brokerage expects strong institutional demand to continue supporting gold prices into 2025, potentially pushing them to $2,700/oz. For those looking to hedge against geopolitical risks and inflationary pressures, gold remains a “Most Preferred” asset in UBS’s strategy. Investors can gain exposure through physical gold, structured products, ETFs, or gold mining equities.

As the Federal Reserve continues to cut rates, UBS analysts maintain that fixed-income markets will remain an attractive space for generating stable returns. 

Although tactically neutral on fixed income, UBS flags that the broader bond market offers valuable opportunities for income generation in the months ahead. Investors can expect up to 100 basis points of further rate cuts in 2024, with another 100 basis points likely in 2025. 

This rate-cutting trajectory will make bonds, particularly those of higher credit quality and medium duration, a more appealing option compared to cash or lower-yielding money market instruments.