“For investors, these should serve as strong reminders that staying invested and well-diversified pays off, especially during periods of high uncertainty,” says Tan Min Lan, UBS’s head chief investment office for Asia Pacific (Apac) and UBS’s chief investment officer, Mark Haefele, in their mid-year outlook report.
“A balanced portfolio spread would have captured gold’s outperformance and strong gains across Apac, European and emerging markets since the start of this year. Those who stayed invested in the US stocks through their steepest correction since the pandemic were also rewarded with a forceful recovery,” they add.
Is US exceptionalism back?
Earlier in May at UBS’s Asian Investment Conference, Iqbal Khan, UBS’s co-president of global wealth management Apac, said that things have changed since the start of 2025, when the consensus was to “invest in the US”.
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With US markets once again at record highs, is US exceptionalism making a comeback?
Heading into the second half of 2025, fears persist among investors as the US continues to navigate numerous macroeconomic challenges that could still threaten economic growth.
The US’s fiscal deficit has been a topic of concern for a long time, with the country already having one of the highest debt-to-gross domestic product (GDP) ratios, estimated to be approximately 123%.
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With the passage of the US Tax and Spending Bill — also dubbed the ‘Big, Beautiful Bill’ — on July 3, the country is expected to add more than US$3 trillion ($3.8 trillion) to the country’s deficit over the next decade.
Speaking at the bank’s mid-year outlook seminar on July 1, Tan expects deficits to rise by a margin of 6% of GDP going into 2027. “US interest payments now exceed defence spending and are second only to social security. So Treasury supply is ballooning and bond market volatility is high,” says Tan.
While this does present itself as a longer-term concern, Tan does not expect a sustained sell-off in the bond market. The way she sees it, US nominal growth is “too solid” and remains above average interest cost. At the same time, the Fed remains a credible backstop with tools such as quantitative easing, capital rules, or even yield curve control, to absorb the excess supply of treasuries if necessary. “Most importantly, US Treasuries remain the world’s most trusted collateral pool. The bottom line is that we expect the US 10-year treasury yield to continue to ease towards 4% by the end of this year,” she adds.
With all the potential economic headwinds and uncertainty in the US market, the strength of the greenback has taken a hit. The depreciation of the USD this year by nearly 10.3% year-to-date (ytd), according to the US dollar index (as of July 8), has amplified de-dollarisation concerns and nudged investors towards hedging and diversifying their USD exposure.
“We expect US exceptionalism to fade. After expanding by nearly 3% over the past two years, we expect US GDP growth to decelerate to 1.6% this year and 1.2% next year. Secondly, as US yields fall, we believe investors’ appetite to hold USD will also decline due to market concerns such as US trade policy, tax policy and fiscal sustainability,” note Tan and Haefele.
Given the prevailing view that there will be medium-term USD weakness, the pair recommends strategic diversification towards other preferred currencies, such as the Australian dollar (AUD), the Singapore dollar (SGD), the Euro (EUR) and the British pound (GBP).
Across other currencies, Asian currencies have been standout performers this year, rallying by almost 5% between the start of April and mid-June. The Singapore dollar, for example, has appreciated nearly 6.7% ytd against the USD.
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Despite a temporary pullback due to Middle Eastern tensions surrounding Iran, which have spiked oil prices and raised fears over potential impacts on global growth, UBS’s base case is for Asian currencies to appreciate by around 3% to 4% against the USD in the medium term.
Along with diversification into other currencies, Tan and Haefele re-emphasise the usefulness of gold as a hedge against economic weakness, geopolitical risks and declining real interest rates. “We maintain our US$3,500 target price and do not rule out the potential for prices to exceed this level if geopolitical risk escalates.”
A way investors should consider the Trump-induced new geopolitics is to diversify their exposure, says Singapore’s former foreign minister George Yeo. “The ground is shaking, so build smaller structures linked together sensibly instead of bigger structures. Don’t assume one outcome or the other, but diversify risks in your portfolio, whether you are a country, company, family or individual,” says Yeo — who was foreign minister from 2004 to 2011 — at the UBS event.
There is understandable nervousness over what Trump is doing in the short term, but Yeo sees it differently; Trump himself is being “carried” by big events. “He will come, and he will go, and he will have quickened the arrival of the multi-polar world. I describe him as fast-forwarding the future.”
Meanwhile, Singapore remains a safe haven market. Local equities have been outperforming many of their regional peers, given the market’s defensive nature compared to other equity markets, such as those of the US. Amid geopolitical uncertainties, Singapore is seen as a safe haven, providing relative currency stability, resilient dividend yields and potential upside from further capital management initiatives, said UBS.
For one, the MSCI Singapore index averages a strong 4.5% estimated dividend yield for 2025, which is superior compared to the 1.9% dividend yield of the MSCI World Index.
Additionally, a top-level committee is implementing measures to revitalise Singapore’s equity market. The first of such programmes includes a $5 billion capital injection by the government, where the central bank, the Monetary Authority of Singapore, will allocate to fund managers to invest in counters outside the Straits Times Index.
This move, according to UBS, could lead to higher valuation multiples and increased trading liquidity, which could potentially benefit the country’s small and mid-cap sectors significantly.
“The small and mid-cap segment of the market may emerge as first-order beneficiaries if the additional liquidity is targeted at broadening equity market engagement.”
Currently, the bank is selective among Real Estate Investment Trusts (REITs), preferring those with Singapore-based assets, as well as those involved in the data centre and retail industries.
The falling interest rates are also expected to benefit REITs, as they become more able to refinance at lower rates.
Transformative industries
Beyond the short term and local markets, investors should also watch for major shifts. Occasionally, game-changing innovations spark a surge of investment opportunities.
“General Motors was the first company to reach a US$10 billion market cap. How? Because it was a leader in automobile innovation. IBM was the first company to reach a US$100 billion market cap. How? Because it was early in the computing industry and held a monopoly on the mainframe. Apple was the first US$1 trillion company because of how it became a leader in mobile computing,” says Dr Ulrike Hoffmann-Burchardi, UBS’s chief investment officer, Americas.
“So all of these companies reached new levels of market value transformational innovation and it is not just single companies, but its whole sectors that have been created by these technological innovations,” she adds.
UBS expects structural trends to remain a lasting source of portfolio diversification and long-term earnings potential. The bank also sees AI, power, resources and longevity as four transformational innovations that present compelling themes for investors.
“AI is the first technology in human history that is self-improving. So, current models of AI train the next generation of AI, and this is why we see unprecedented change. With all these abilities, we believe AI will boost productivity to levels we have not seen before,” says Ulrike.
In the near term, UBS projects that AI revenues will reach US$2.6 trillion by 2040, a 41% CAGR. The cloud and infrastructure layer is expected to reach US$1.2 trillion by 2030, growing at a 31% annual rate.
While key risks remain in the coming months, including the US AI action plan expected in July and tariff-related concerns, UBS recommends adding laggards in the AI sector along with software stocks. As AI adoption grows, power grids will also need to meet the rising energy demands it generates alongside broader global needs.
“We believe that by 2030, investments spent on electrification will reach $3 trillion annually. Why? Because we have such an acute mismatch in demand and supply. On the demand side, we need to electrify buildings, transport but also industrial facilities. More broadly, we now have AI. We need more electricity for AI data centres, and that will change the way we generate power through more renewables,” says Ulrike.
UBS also favours equipment suppliers and utility companies driving electrification. Beyond AI, tech and electrification, structural opportunities in longevity continue to emerge.
By 2030, the global population of adults aged 65 and older is expected to reach one billion, presenting opportunities in the healthcare sector, particularly in areas such as medical technology and pharmaceuticals.
Besides healthcare, senior living, retirement real estate, insurance and wealth management service providers are also set to benefit. With all this, UBS projects that an ageing global population is set to fuel a longevity economy, projected to grow from US$5.3 trillion in 2023 to US$8 trillion by 2030.
“We believe that at least some part of the portfolio should be dedicated to these transformational opportunities. Lastly, let me leave you with one prediction: the next US$10 trillion companies will most likely arise from one or more of these transformational opportunities,” says Ulrike.
