UBS CEO Warns of Market Complacency: Geopolitical and Inflation Risks Stack Up, Rates May Stay 'Higher for Longer'

UBS CEO Ermotti issued a warning that complacency is spreading across global financial markets while risks quietly accumulate. With the triple threat of geopolitical conflicts, supply chain pressures, and stubborn inflation, the European Central Bank may lead the way in raising rates, followed by the Federal Reserve, making high rates the "new normal." Wealthy investors have quietly shifted toward diversified allocations but have not retreated from dollar assets.

UBS Group Chief Executive Officer Sergio Ermotti warned that financial markets have developed a dangerous sense of complacency over the past few years, even as geopolitical and economic risks continue to build. He expects persistent inflationary pressures to force major central banks to keep raising interest rates, with rates remaining elevated for the foreseeable future.

In a CNBC interview on Thursday, Ermotti said that given the current risk environment, market volatility should be significantly higher, but that is not the case. He pointed out that energy and shipping risks from the Iran situation and the Russia-Ukraine conflict, ongoing supply chain disruptions from geopolitical competition, and persistently high borrowing costs are together creating a complex set of headwinds. "New problems keep emerging, while none of the old ones have been resolved or ended," he said.

On the interest rate outlook, Ermotti made clear that the European Central Bank may be the first to initiate a new round of rate hikes, with the Federal Reserve following suit, and several hikes are expected in the coming months. He stressed that inflationary pressures "are still there and show no signs of abating," and investors should not expect borrowing costs to quickly fall back to previous low levels.

Complacency Spreads as Risks Accumulate

Ermotti noted 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 reason why market volatility has not fully reflected the risks.

However, he warned that the current macro environment is becoming increasingly complex. On the geopolitical front, the Iran situation and the Ukraine war continue to disrupt energy prices and shipping lanes; on the economic front, U.S.-China competition is intensifying supply chain pressures, while high interest rates and stubborn inflation are placing a double constraint on economic growth.

"In this environment, holding too many strong directional views is both difficult and unwise," Ermotti said.

Wealthy Investors Shift to Diversification but Stay in Dollar Assets

Faced with these uncertainties, wealthy investors globally are adjusting their strategies, tending to spread bets across a broader range of sectors and regions rather than making large directional moves.

Ermotti said UBS clients have been steadily diversifying across industries and regions over the past several quarters, while maintaining investments in AI and technology. However, he stressed that clients' overall asset allocations have not changed materially over the past year, and this diversification trend does not mean a wholesale retreat from U.S. assets.

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

Rate Hike Expectations Rise, High Rates May Become the New Normal

On the monetary policy outlook, Ermotti's view is relatively clear: sticky inflation will leave major central banks with no choice but to continue tightening policy.

He expects the European Central Bank may be the first to start the rate hike process, with the Federal Reserve following, and the Bank of Japan also in the mix, with several hikes expected in the coming months. This means the market's previous optimism about rate cuts may need to be recalibrated.

"Inflationary pressures are still there and not abating, so it is reasonable to expect higher rates for the foreseeable future," Ermotti said. He also noted that the sustained high-rate environment is prompting investors to adopt more balanced portfolio allocations.