A key theme in global capital markets has been the disparity between macroeconomic challenges and sector-specific growth, notably in AI. Despite persistent macro risks, such as the US-Iran war, threats to oil supplies, inflation, rising government fiscal deficits, and rate volatility, some sectors continue to outperform.

“This disconnect highlights the need for diversification and portfolio resilience,” Jade Fu, head of global multi-asset portfolio management, Apac, UBS Asset Management, told a media briefing at last week’s UBS Asian Investment Conference in Hong Kong.

However, the traditional 60/40 portfolio is insufficient due to the weakening negative correlation between equities and bonds and higher volatility.

“Instead, investors should look beyond traditional allocations, diversifying across and within asset classes, including alternatives,” Fu said.

But, as its recent price slide demonstrated, single alternatives such as gold may not provide effective diversification. In fact, in March, only the US dollar and Chinese government bonds offered meaningful diversification, according to Fu.

Moreover, amid the exuberant rally in AI stocks, which Fu said is hard to resist, there are multiple sub-themes offering distinct opportunities.

“Extracting alpha has become more challenging, making deeper analysis and thematic investing essential. Market leadership in AI has shifted several times this year, and simply investing in broad technology or well-known AI names is no longer sufficient,” she said.

UBS AM’s multi-asset team has adapted by shortening investment horizons and implementing options strategies to improve skew and convexity, allowing continued participation in AI while managing downside risk.

“This more granular, thematic approach is increasingly necessary. Our diversification across geographies, sectors, and themes complements the bottom-up strategies of our underlying managers. The multi-asset industry is evolving, and ongoing innovation in portfolio construction is critical,” Fu explained.

War shock prompts diversification

Nevertheless, the conflict in Iran has introduced significant geopolitical risk, affected commodity markets, and driven oil prices higher. Markets initially expected a brief disruption, but the prolonged closure of the Strait of Hormuz intensified market reactions, especially in fixed income.

“Compared with previous shocks such as Liberation Day, which had a stronger impact on US Treasuries, this event has reinforced the trend of diversification away from US dollar assets,” said Massimiliano Castelli, head of strategy and advice, sovereign institutions, UBS AM.

While the recent conflict briefly boosted demand for US dollar-denominated safe assets, Castelli expects the dollar to remain weak once the Middle East crisis stabilises, providing opportunities in non-dollar assets.

“We see a positive outlook for emerging markets, supported by macro stability and improved corporate profitability. With current allocations low and recent outflows further reducing exposure, there is meaningful potential for capital to return to both fixed income and equities in these regions,” he said.

Matthias Dettwiler, global head of active fixed income, UBS AM also noted the shift in attitudes among investors compared with their relative optimism before March.

Inflation risks are subsiding

“At the start of the year, 25 central banks were expected to ease policy, leading to a preference for longer-duration assets,” he said. The continued conflict, however, raised concerns about energy and commodity shortages, prompting a reassessment.

In the US, rising real rates reflect investor focus on persistent deficits and debt-to-GDP ratios. “While these issues are not new, they are receiving increased attention,” said Dettwiler.

On the other hand, he believes most inflation risk is already priced into US, European, Australian, and New Zealand markets, and therefore favours exposure to the front end of the yield curve.

In credit, spreads are not historically wide, but fundamentals are strong. “When spreads widen, buying interest quickly returns, and markets can absorb significant new issuance,” said Dettwiler.

Companies generally have robust cash flows and balance sheets, and technical factors are supportive. Absolute yields of 5–6% are attracting investors to relatively safe assets.

“While selectivity is warranted in some sectors, overall market stability and attractive yields are drawing both private and professional investors,” he said.

In short, most inflation risk appears priced in, and credit fundamentals remain robust, while diversification—across regions, sectors, and themes—is essential given evolving macro and geopolitical risks.

Emerging markets, particularly those with improving fundamentals, remain underrepresented in global portfolios and present long-term opportunities. In particular, UBS AM believes that China now presents an “alpha opportunity, especially in technology and AI.

However, portfolio resilience and innovation in asset allocation are more important than ever, the panel concluded.