UBS CEO Sergio Ermotti has warned that financial markets have become too comfortable with risk, noting that investors are showing a level of complacency that is difficult to reconcile with the growing number of geopolitical and economic threats confronting the global economy.
“There has been a level of complacency in financial markets in the last few years,” Ermotti told CNBC’s Christine Tan on Thursday, saying the current environment would normally be expected to produce considerably greater volatility.
Markets have experienced periodic episodes of turbulence, but they have broadly absorbed a series of shocks without a sustained increase in volatility. Ermotti said strong investment in artificial intelligence, data centers and other emerging technologies has helped support economic activity and financial markets, providing an important counterweight to geopolitical and macroeconomic pressures.
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The concern, he said, is that investors are facing an increasingly complicated risk environment in which new problems continue to emerge before older ones have been resolved.
“New problems or new issues are emerging without any of the old ones being addressed or being closed,” Ermotti said.
The backdrop includes energy and shipping disruptions linked to the wars in Iran and Ukraine, continuing U.S.-China tensions that have strained global supply chains, and higher borrowing costs alongside persistent inflation. Together, those forces create a more difficult environment for companies, consumers, and investors even as technology spending continues to support parts of the economy.
For wealthy investors, the response has increasingly been to spread exposure across markets rather than make large directional bets.
Wealthy Investors Hedge Rather Than Retreat
“It’s quite difficult in this environment and not really advisable to have too many strong convictions,” Ermotti said.
UBS clients have been diversifying across sectors and geographies in recent quarters while maintaining their exposure to artificial intelligence and technology, he said. The shift, however, has been more measured than a wholesale repositioning of portfolios.
Overall asset allocation among UBS clients has not changed materially over the past year, according to Ermotti. Nor has diversification represented a broad retreat from U.S. assets or the dollar.
UBS observed some movement into global emerging markets about a year ago, but Ermotti said those flows were largely driven by investors putting excess cash to work rather than withdrawing existing investments from the United States.
“It was more how excess cash was deployed rather than people back trading from the U.S. or from the dollar, so I think that narrative has abated,” he said.
The dollar, he added, remains “a reference currency.”
Market discussions about diversification have often been interpreted as evidence that international investors are actively reducing their exposure to U.S. assets. Ermotti’s assessment suggests a more incremental adjustment, with investors broadening portfolios while retaining significant exposure to the world’s largest financial markets.
The strategy also reflects a broader difficulty facing investors. When geopolitical risks, inflation, interest rates, and technology-driven market gains are moving simultaneously, taking a strong position on any single economic outcome becomes harder to justify.
Rather than abandoning risk assets altogether, investors are attempting to distribute risk across regions and sectors.
Higher Rates Challenge The Soft-Landing Trade
Interest rates are emerging as another major source of uncertainty. Ermotti said persistent inflation is forcing investors to adopt a more balanced approach to portfolios because borrowing costs may remain elevated for longer than markets had anticipated.
Inflation has remained sticky and above central-bank targets over the past year, he said, making further monetary tightening a reasonable possibility. Ermotti expects major central banks, including the European Central Bank, the Federal Reserve and the Bank of Japan, to raise rates in the coming months.
“The ECB may start hike process. The Fed will follow. We do expect a couple of hikes in the next few months,” he said.
That outlook challenges the assumption that interest rates will quickly return to the exceptionally low levels that prevailed before the latest inflation shock.
Higher rates matter well beyond government bond markets. They raise financing costs for businesses, increase the discount rate applied to long-duration assets and can pressure valuations that have benefited from expectations of strong future growth. They also make cash and fixed-income investments more competitive relative to riskier assets.
For markets that have remained resilient partly because of strong corporate investment in AI, data centers and other technologies, the persistence of higher rates could become more necessary. Technology spending may continue to support economic growth, but it does not eliminate the broader effects of tighter financial conditions.
“Inflationary pressure is still there, and it’s not abating, and therefore, I think it’s reasonable to expect higher rates for the foreseeable future,” Ermotti said.
His warning therefore goes beyond a call for investors to prepare for another bout of market volatility. It points to a more fundamental mismatch between the risks accumulating beneath financial markets and the relatively subdued level of investor anxiety.
Markets have repeatedly demonstrated their ability to look through geopolitical shocks, supply-chain disruptions and inflation concerns. But Ermotti’s argument is that resilience should not be confused with the disappearance of risk.
For investors, analysts believe the implication is less about abandoning U.S. equities, technology or other risk assets and more about recognizing that the conditions supporting them can change quickly. If inflation remains persistent and major central banks resume tightening, the cost of maintaining concentrated positions could rise at the same time geopolitical risks remain unresolved.
That is why UBS clients are diversifying without making a wholesale retreat. In Ermotti’s view, the prevailing environment offers too many competing risks to justify excessive conviction in any single market outcome.