UBS CEO warns of market complacency: Geopolitical and inflation risks combined could lead to "higher and longer" interest rates.

UBS CEO Sergio Ermotti warned that a dangerous complacency has grown in financial markets over the past few years, while geopolitical and economic risks continue to accumulate. He predicts that persistent inflationary pressures will force major central banks to continue raising interest rates, which will remain high for the foreseeable future.

In an interview with CNBC on Thursday, Ermotti said that given the current risk environment, market volatility should have been significantly higher, but this is not the case. He pointed out that the energy and shipping risks from the situation in Iran and the Russia-Ukraine conflict, the continued impact of geopolitical competition on supply chains, and persistently high borrowing costs are all creating a complex headwind. "New problems keep emerging, while none of the old problems have been resolved or ended," he said.

Regarding the interest rate outlook, Ermotti clearly stated that the European Central Bank is likely to initiate a new round of interest rate hikes, followed by the Federal Reserve, with several rate hikes expected in the coming months. He emphasized that inflationary pressures "remain and show no signs of abating," and investors should not expect borrowing costs to quickly fall back to previous low interest rate levels.

Complacency is spreading, but risks are mounting.

Ermotti points out that strong investment in artificial intelligence, data centers, and emerging technologies has, to some extent, supported economic growth and financial market performance, which may be one of the important reasons why market volatility has failed to fully reflect risks.

However, he warned that the current macroeconomic environment is becoming increasingly complex. Geopolitically, the situation in Iran and the war in Ukraine continue to disrupt energy prices and shipping routes; economically, competition between the US and China is intensifying supply chain pressures, while high interest rates and persistent inflation are doubly constraining economic growth.

"In this environment, it is neither easy nor wise to hold too many strong directional judgments," Ermotti said.

Wealthy investors are diversifying their portfolios, but have not withdrawn from dollar assets.

Faced with these uncertainties, wealthy global investors are adjusting their strategies, tending to diversify their bets across a wider range of sectors and regions rather than making large-scale directional moves.

Ermotti stated that UBS clients have continued to diversify their portfolios across industries and regions over the past few quarters, while maintaining investments in artificial intelligence and technology. However, he emphasized that clients' overall asset allocation has not changed substantially in the past year, and this diversification trend does not signify a complete withdrawal from US assets.

He noted that about a year ago, he observed some funds flowing into emerging markets globally, but characterized it as investors putting idle cash to use rather than actively reducing their U.S. or dollar positions. "It's more about how to deploy excess cash than withdrawing from U.S. or dollar assets, and that narrative has faded," he said, adding that the dollar remains a "reference currency."

Expectations of a central bank interest rate hike are rising, and high interest rates may become the new normal.

Regarding the outlook for monetary policy, Ermotti's assessment is quite clear: the stickiness of inflation will leave major central banks with no choice but to continue tightening policies.

He predicts that the European Central Bank may be the first to initiate an interest rate hike process, followed by the Federal Reserve, with the Bank of Japan also expected to follow suit, with several rate hikes anticipated in the coming months. This means that previous market optimism regarding interest rate cuts may need to be recalibrated.

"Inflationary pressures remain and have not subsided, so I think it's reasonable to expect higher interest rates for the foreseeable future," Ermotti said. He also noted that the persistently high interest rate environment is prompting investors to adopt a more balanced approach to portfolio allocation.

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