The probability of the Federal Reserve raising interest rates in September has risen to around 60%. UBS has released an investment strategy suggesting that investors take advantage of market fluctuations to buy stocks at lower prices, seize opportunities from rising medium to long-term bond yields, and establish hedging positions when gold prices pull back.

Source: Jinshi Data

The unexpectedly strong U.S. non-farm payroll data for August is significantly changing the market's assessment of the Federal Reserve's September policy. UBS believes that the market volatility brought about by the repricing of interest rate expectations may actually provide opportunities for investors to adjust their asset allocations.

In August, non-farm payrolls increased by 162,000, far exceeding the market expectation of 55,000, while the unemployment rate remained at 4.1%. This marks the strongest monthly job growth since March.

Following the release of the employment report, traders estimate that the probability of the Federal Open Market Committee (FOMC) raising rates by 25 basis points at the meeting on September 15-16 is about 60%.

UBS stated that the key issue is not whether the Federal Reserve will raise rates at its next meeting, but the economic reasons underlying that decision. Mark Haefele, Chief Investment Officer of UBS Global Wealth Management, and his team of strategists pointed out that raising rates due to economic strength is fundamentally different from raising rates due to inflationary pressures, each impacting portfolios in distinct ways.

"The Federal Reserve's action in response to the strengthening U.S. economy is fundamentally different from its response to inflation issues. This distinction is far more important for portfolios than the next policy meeting," he said.

In UBS's view, the positive labor data from August aligns more closely with the former scenario, indicating a resilient economy where inflation pressures are not the sole driving force.

If market fluctuations occur due to interest rate expectations, UBS suggests that investors look in several directions. The strategists noted that this includes buying stocks at lower prices when earnings prospects remain strong, taking advantage of opportunities in medium to long-term high-quality bond yields, reducing excess dollar positions when the dollar strengthens, and waiting to build long-term investment portfolio hedges after gold price pullbacks.

Stocks: Volatility Provides Positioning Opportunities

UBS remains optimistic about global stocks.

The strategists acknowledge that rising yields may create market volatility in the short term and apply pressure on interest rate-sensitive sectors. However, even if monetary policy tightens further, it may not overwhelm several important factors driving the stock market in the medium term.

These factors include capital expenditures related to artificial intelligence, resilient economic activity, and broader earnings growth.

"We continue to be optimistic about the upside potential of stocks and prefer themes such as artificial intelligence, electricity and resources, and longevity, all of which should benefit from stronger investment, improved productivity, and structural growth," UBS stated.

Bonds: Short to Medium Term Yields Not Worth Locking In

Compared to stocks, UBS's assessment of government bonds is more divided.

If the market further reprices policy rates upwards, government bond returns may be pressured, and capital appreciation potential will be limited, especially on the short end of the yield curve.

"We no longer recommend that investors lock in short to medium term bond yields as a cash substitute," UBS strategists wrote.

UBS is more focused on the opportunities that arise from the recent rise in medium to long-term bond yields. For portfolios, this segment of yields may offer income while providing a certain level of diversification.

If the Federal Reserve's tightening enhances market confidence in its inflation commitments and consequently lowers long-term inflation expectations or slows GDP growth, then medium to long-term bonds may ultimately benefit from this.

Dollar: Strong Growth May Extend Strong Cycle

Regarding the dollar, UBS believes that the Federal Reserve's shift to a hawkish stance is favorable for the dollar, particularly as the policy divergence between the U.S. and other major central banks continues to widen.

"Tightening policy in the context of robust growth may support the dollar for a longer period through stronger capital inflows and relative economic performance," UBS stated.

However, if the tightening is primarily driven by inflation while economic growth weakens, the outlook for the dollar becomes more complex. UBS noted that in such a scenario, higher yields may be countered by market concerns over fiscal sustainability and long-term economic prospects.

Gold: Under Pressure in the Short Term, Yet a Long-Term Hedge Tool

In the short term, the environment for gold is not very friendly.

Rising real interest rates and a stronger dollar will pressure gold prices. However, persistent inflation, geopolitical uncertainties, and market concerns regarding fiscal and monetary credibility may offset these headwinds and reinforce gold's role as a safe-haven asset.

Therefore, UBS does not recommend treating gold merely as a tactical trade betting on the next Federal Reserve decision.

"We currently view gold more as a hedging and diversification tool for portfolios rather than a tactical expression regarding the Federal Reserve's next decision," UBS strategists stated.

UBS also pointed out that commodities can provide both structural returns and asset diversification value in situations where energy supplies are disrupted or inflation becomes a problem for the stock and bond markets again. Electrification, growing electricity demand, investments in artificial intelligence infrastructure, and constrained supply all support the long-term outlook for this asset class.