UBS Sees Buying Opportunity in Potential Fed Rate Hike Amid Strong Jobs Data

The US jobs report for August revealed a significant increase in employment, with 162,000 jobs added, nearly triple the consensus forecast of 55,000. The unemployment rate remained stable at 4.1%. This robust job growth, the strongest monthly addition since March, has increased the market's pricing of a potential quarter-percentage-point interest rate hike by the Federal Reserve at its September 15-16 meeting to around 60%.

Investment bank UBS views this development not as a threat but as a buying opportunity. They differentiate between rate hikes driven by economic strength and those responding to persistent inflation alongside slow growth, arguing the former scenario, indicated by the jobs data, is more positive for investment portfolios. Consequently, UBS suggests that volatility surrounding a rate hike presents a chance to enter the market rather than exit.

UBS recommends several portfolio adjustments. They advise buying dips in stocks, provided earnings forecasts remain strong, and suggest shifting focus to the medium and long ends of the bond yield curve, as yields have already risen there. Investors are also encouraged to reduce excess dollar holdings while the currency is strong and to build long-term hedges in gold by taking advantage of price drops, viewing it as portfolio protection rather than a bet on the Fed's next move.

The bank highlights three key investment themes: Artificial Intelligence (AI), energy and resources, and longevity. These sectors are expected to benefit from substantial long-term investments, productivity improvements, and structural growth, independent of interest rate cycles. UBS previously anticipated no rate hikes but now sees the possibility of two, noting that high bond yields can make stocks appear expensive.

For Israeli investors, UBS's advice includes ceasing to lock in yields on short-to-medium-term bonds, which has been a common strategy for cash equivalents and short deposits. Additionally, reducing excess dollar exposure while the dollar is strong is a relevant consideration for Israeli savers who have increased their dollar holdings during periods of uncertainty.