Private bank CIOs shift strategies as market uncertainty grows

Alternatives and dynamic asset allocation are defining the new order for private banks seeking to navigate risks and seize new opportunities in response to trade tensions.

Private bank chief investment officers (CIOs) expect a volatile yet opportunity-rich 2025, as geopolitical tensions and economic uncertainty unsettle global markets. After two years of strong gains, driven by US mega-cap tech stocks, renewed volatility is prompting investors to rethink their strategies.

Markets have stumbled amid US president Donald Trump’s unpredictable tariffs, fuelling slowdown concerns. Meanwhile, efforts to counter trade risks, Nato defence spending pressure, and Germany’s fiscal expansion are driving investor interest in Europe, while China’s stimulus adds another layer to global strategies.

PWM’s 10th annual Global Asset Tracker Survey, conducted during Mr Trump’s first month back in office, finds his policies poised to reshape markets. Insights from CIOs and strategists at 50 private banks managing $25tn in assets highlight widespread expectations of economic shifts under his administration. An overwhelming 94 per cent of respondents foresee continued economic ramifications, though opinions are divided.

Some view deregulation and pro-growth measures as a growth catalyst while others fear protectionism and escalating trade disputes could heighten the risk of a global downturn.

“Trump’s overwhelming victory gives him a strong mandate to pursue his agenda,” says Pedro Real de Asua Guinea of CaixaBank Banca Privada. “The challenge is that while some policies are highly beneficial, others could prove harmful. Which version of Trump will prevail?”

Despite rising uncertainty, 96 per cent of CIOs expect a ‘soft’ or ‘no landing’ for the US economy this year, reinforcing optimism around corporate earnings and consumer spending (see Chart 1).

Mark Haefele, global CIO at UBS Global Wealth Management, sees an “attractive risk-reward in equities” but warns of near-term tariff-related volatility. UBS, managing more than $4tn in assets, forecasts a 10 per cent upside for US stocks in 2025, driven by economic growth, AI advancements and falling yields.

While 60 per cent of CIOs have an overweight allocation to equities (see Chart 2), two-thirds favour US equities for the best risk-adjusted returns in 2025.

Yet, 90 per cent expect market performance to broaden beyond mega-cap tech, extending across geographies and sectors (see Chart 3). Financials, healthcare and industrials emerge as the most promising areas (see Chart 4).

US tech, including the so-called ‘Magnificent Seven’ mega-cap companies, remains dominant, accounting for 44 per cent of the S&P 500 and 34 per cent of global equities. However, a slowdown in AI infrastructure investment could weigh on earnings, warns Nicolas Laroche, UBP’s global head of advisory and asset allocation.

“While we continue to favour US tech as a core holding, we encourage investors to broaden their equity exposure by considering opportunities in financials, healthcare and US mid-cap stocks in order to build a more resilient portfolio.”

The influence of the Mag 7 on the S&P 500 has risen sharply over the past five years. Their combined weighting has climbed from 21.9 per cent in 2020 to more than 30 per cent in 2024 - the highest concentration on record - accounting for 53.7 per cent of the index’s total return.

César Pérez, chief investment officer at Pictet, expects market gains to broaden and advises prioritising companies that benefit from AI rather than those building its infrastructure. “Investors should focus on firms using AI to enhance efficiency rather than those spending heavily on AI development,” he says.

Yet, risks remain, he says, as rising tariffs could fuel inflation, forcing the Fed to keep rates higher for longer, which may pressure smaller, more leveraged companies.

Markets initially anticipated a more measured approach from the new US administration, but recent policy moves have raised recession fears, says Mr Pérez. While his base case assumes tariffs will not severely disrupt the economy, he warns that “economic nationalism” could take priority over inflation control, despite the latter being central to the president’s election victory.

Equities could face a “more turbulent” year than in 2023 and 2024, believes Yves Bonzon, CIO of Julius Baer. While not expecting a recession, he cautions that current investor positioning leaves markets vulnerable to negative surprises, with potential corrections of 10-15 per cent. “We remain fully invested but diversified, with no stylistic or regional bias.” An overweight cash position, he recommends, offers flexibility to navigate the months ahead.

Although three-quarters of CIOs see market concentration as a byproduct of innovation, a similar proportion also view it as a risk to financial stability, with two-thirds anticipating heightened volatility and major pullbacks in 2025.

Policy uncertainty and inflation concerns

UBS attributes the sharp post-election drop in the S&P 500 more to the unwinding of stretched positions — particularly in tech and momentum stocks — than to fundamental weakness. Its base case (50 per cent probability) is that US growth will moderate this year but avoid recession. While policy uncertainty may weigh on growth, the economy remains resilient, with low unemployment, solid job gains, and a stable consumer. Corporate America is also in “good shape”, with UBS still expecting 8 per cent earning per share (EPS) growth for the S&P 500 this year.

However, with the US administration signalling it may tolerate a moderate economic slowdown to lower bond yields, UBS now sees a 30 per cent chance of a stagflationary or cyclical downturn within six to 12 months. Tariffs on Canada and Mexico remain a key concern, as prolonged trade disruptions could amplify these risks.

“We have entered a period of extreme policy uncertainty, and risks have increased,” acknowledges Solita Marcelli, CIO Americas at UBS Global Wealth Management. Yet, she advises clients to stay invested while hedging downside risks, welcoming the recent sell-off as a buying opportunity, particularly in US stocks linked to AI, energy and infrastructure.

Echoing these views, Wells Fargo advises investors to rebalance portfolios to target allocations, maintaining an overweight stance on US large caps.

Wells Fargo attributes the current rotation out of AI and tech stocks to economic strain, rising tariffs, and intensifying global AI competition — particularly following DeepSeek’s breakthrough in Chinese tech. “We have been advising investors to reduce exposure to semiconductor stocks and diversify within large caps, while also maintaining allocations to mid and small-cap stocks,” says Tracie McMillion, head of global asset allocation strategy at Wells Fargo Investment Institute.

“Investors may be reluctant to sell their winners, but taking profits and diversifying is crucial — what leads today can underperform for a meaningful period.”

The bank favours energy, industrials, financials and communication services, pointing to strong financial discipline, reshoring trends and AI infrastructure expansion. It also cites steeper yield curve and potential deregulation as supportive factors.

While immigration and tariff policies pose near-term risks, Wells Fargo expects deregulation and tax cuts in the year’s second half to support markets. “We see this as a soft patch rather than a downturn driven by fundamentals,” adds Ms McMillion, noting that recent market weakness appears sentiment driven.

Meanwhile, its underweight stance on emerging market equities reflects concerns over weak Chinese domestic demand, trade pressures, and economic challenges in India and Mexico. Only a quarter of respondents see emerging market stocks as attractive, while 30 per cent see opportunities in Asian and Chinese equities.

Pictet’s Mr Pérez highlights Trump’s geopolitical focus on China, with a strategy aimed at weakening its ties with Russia. “Trump views China as a long-term threat and is likely to target its economy through tariffs and restrictions on high-end chip exports, keeping pressure on Chinese markets,” he says.

HSBC takes a different approach, emphasising geographical diversification, particularly within Asia. While Japan, India, and Singapore remain overweight positions, the bank upgraded Chinese stocks earlier this year while trimming US exposure. “China’s technological progress is clear, and sentiment is improving as the government shifts towards greater support for the private sector and innovation,” says Willem Sels, global CIO at HSBC Global Private Banking.

With many investors underweight Chinese tech stocks, which trade at low valuations, HSBC sees potential for a positive rerating. “China’s deflationary pressures remain, so we maintain a barbell approach, favouring technology on one side and dividend-paying state-owned enterprises on the other."

Despite short-term headwinds, he remains positive on India’s long-term prospects, citing its structural growth potential. Additionally, expected Fed rate cuts and a weakening dollar should further support emerging markets.

Investor interest in European stocks is also growing, fuelled by higher defence and infrastructure spending, optimism over a potential Russia-Ukraine resolution and prospects for post-war reconstruction. With valuations still attractive, two thirds of CIOs see European equities as a compelling diversification opportunity.

CIOs see escalating tariffs and a prolonged trade war as the biggest threats to markets (see Chart 5). Persistent inflation remains another concern, as it could limit central banks’ ability to provide economic support.

While tariffs dominate the inflation debate, Nannette Hechler-Fayd’herbe, Lombard Odier Group’s CIO for Emea, highlights migration policy’s role in wage pressures. Still, falling oil prices may help ease inflationary pressures, reinforcing the bank’s forecast of two Fed rate cuts in 2025.

“With central banks cutting rates, albeit at different paces, liquidity will yield less and less, strengthening the case for deploying capital into markets rather than holding cash,” she says.

Lombard Odier’s analysis suggests risk-adjusted returns are now similar across fixed income, equities and alternatives. “On a risk-adjusted basis, asset classes have converged, making broad diversification a sensible approach for multi-asset allocators,” adds Ms Hechler-Fayd’herbe.

Alternatives gaining traction

With market volatility increasing and geo-political developments playing a larger role in market moves, CIOs are broadening their investment strategies. Seventy per cent favour greater diversification, two-thirds support dynamic asset allocation, and nearly half consider alternative investments essential (see Chart 6).

Gold has strengthened as a geopolitical hedge, with nearly 60 per cent of CIOs expecting sustained gains. “Gold has decoupled from traditional drivers following the weaponisation of the USD-based financial system,” says Julius Baer’s Mr Bonzon. Sanctions have created divergent investment behaviours, with non-G7 investors increasingly seeking assets beyond Western control, supporting long-term demand for gold.

While the tail-risk profile of this trade has shifted with Donald Trump’s return to the White House, the structural case for gold remains strong, says Mr Bonzon. He points to a multipolar world and emerging market central banks' efforts to reduce reliance on the dollar as key drivers supporting demand. “With central banks – especially China’s — holding relatively low gold reserves, their continued buying remains the primary driver of the market.”

A greater allocation to alternative assets is seen as a key hedge against inflation and the rising correlation between stocks and bonds, with infrastructure, private equity and hedge funds expected to offer the most attractive risk-adjusted returns (see Chart 7).

“US inflation will remain above 2 per cent, potentially closer to 3 per cent, over the next decade, with elevated levels persisting in Europe,” says Bernd Meyer, chief investment strategist at Berenberg Wealth and Asset Management.

With sovereign bonds no longer offering the hedge they did from 2000 to 2020, he recommends increasing exposure towards real assets and other alternatives, including non- directional strategies, such as long-volatility and tail-risk hedging strategies. Private debt and equity also play a central role, while industrial metals stand out, benefiting from the energy transition and rising defence spending. Underinvestment in production capacity also adds to their appeal.

“Alternative investments are no longer just a yield-enhancing tool but a core component of diversification,” adds Mr Meyer. This marks a shift from pre-2022 allocations, with portfolios evolving toward a 40/30/30 split between equities, bonds and alternatives.

Some CIOs, though, highlight the resilience of high-quality fixed income, which has rallied as equities sold off. Given heightened volatility and concerns over deficits and inflation at the long end of the curve, UBS suggests a more cautious approach favouring the middle of the curve - such as investment-grade corporates and five-year Treasuries.

In today’s fragmented investment landscape, passive investing no longer suffices. Active management, alternative assets, and dynamic allocation will be critical, with hedging downside risk playing a critical role, believes UBS’s Mr Haefele. While risks abound, so do opportunities for agile investors, he says. “The path ahead may be uncertain, but well-prepared investors will still find opportunities.”