This upgrade follows US President Donald Trump's announcement on Wednesday of a 90-day pause on the new reciprocal tariffs for countries that have so far refrained from retaliating, apart from China, causing the S&P 500 to climb 9.5 per cent. The US steel and aluminium tariffs, which have been in force for some time, will continue to apply as well as the baseline tariff of 10 per cent that took effect on 5 April.

A tit-for-tat trade war has also escalated between the US and China, with US tariffs on imports from China now totalling 145 per cent and China’s tariffs on US imports reaching 125 per cent. Nevertheless, Trump's post opens the door to potential tariff reduction deals for many trading partners.

“We believe the demonstrated willingness from the Trump administration to change its stance in response to equity and bond market turbulence indicates some sensitivity to market stress, and points to the existence of a ‘Trump put’ in some form,” Mark Haefele, chief investment officer at UBS Global Wealth Management, said. “To be sure, the significant tariffs on China will cause economic disruption if they remain in place. But while downside risks do remain, we believe the risk of a more severe economic downturn is now more limited.”

UBS GWM sees an opportunity for investors to use ongoing volatility to strengthen and diversify portfolios while positioning for longer-term gains. The wealth manager has upgraded US equities to attractive from neutral. It notes that periods of market stress have historically and consistently offered long-term rewards for diversified investors who look through near-term volatility and stay the course or put fresh money to work. At the same time, investing during times of elevated volatility can be fraught, as market timing risks are also more elevated.

One way to mitigate market entry risks is by using a phasing-in strategy, the wealth manager said. Since 1945, phasing into a balanced 60/40 portfolio over 12 months has outperformed cash in about 74 per cent of one-year periods and 83 per cent of three-year periods. When initiated after a market decline of over 10 per cent, this strategy outperformed cash in 82 per cent of one-year periods and 94 per cent of three-year periods.

UBS also believes that gold, quality bonds, and hedge funds represent valuable portfolio diversifiers which investors should consider adding in these volatile times.

“Gold prices will remain well supported by the uncertain trade and geopolitical backdrop as well as the potential for swifter rate cuts from the US Federal Reserve, which lowers the opportunity cost of holding non-yielding assets. We believe gold will continue to offer portfolio diversification benefits, particularly in adverse scenarios,” Haefele continued.

Quality bonds
10-year US Treasury yields now stand at 4.42 per cent, compared with UBS’s year-end target of 4 per cent. This anticipated bond rally should offer respectable total return potential and diversification benefits for portfolios. In a downside scenario, Haefele expects 10-year Treasury yields to fall to 2.5 per cent, offering potentially significant capital gains for investors. Investors at the longer end of the yield curve need to remain mindful of volatility related to fiscal concerns and the unwinding of technical hedge fund “basis trades.”

Hedge funds
Dynamically adapting to macro shifts, hedge fund strategies – such as discretionary macro, equity-market neutral, select relative value or multi-strategy – can cushion portfolios in volatile and down markets, and potentially prosper amid a fast-changing macroeconomic environment.

In its base case, Haefele believes that equities will remain volatile but will rise over the balance of the year owing to various trade “deals” and carveouts, central bank rate cuts, and progress towards a US budget reconciliation bill.

On tariffs, Tan Min Lan, APAC head of CIO, UBS GWM, expects the coming months to bring additional tariffs on sectors including pharmaceuticals and semiconductors but also negotiated carveouts for other sectors as well as the announcement of “deals” with specific countries. Lan also expects the “90-day pause” to be extended where necessary.

Despite the “90-day pause," Haefele believes that the US economy is likely to experience a notable slowdown owing to weaker consumer confidence and potential disruptions related to exceptionally high tariffs on China. He expects the US economy to grow by less than 1 per cent on average in 2025 but expects the unemployment rate to remain below 5 per cent.

Other global economies are also likely to experience weaker growth in 2025, but he expects growth rates to remain positive for the full year. Policy stimulus in Europe and China may help to partially offset the negative effect on economic activity.

Despite higher near-term inflation in the US, Haefele expects all major central banks, apart from the Bank of Japan, to ease policy gradually from mid-2025.