UBS Group AG Chief Executive Officer Sergio Ermotti has issued a stern caution that financial markets have developed a perilous sense of complacency over the last several years, even as geopolitical and economic risks continue to accumulate. He forecasts that persistent inflationary forces will force major central banks to continue their tightening cycle, with interest rates expected to remain elevated for the foreseeable future.

During a CNBC interview on Thursday, Ermotti observed that given the prevailing risk environment, market volatility should be considerably higher than current levels, yet this has not materialized. He highlighted that energy and shipping risks stemming from the situation in Iran and the Russia-Ukraine conflict, ongoing supply chain disruptions caused by geopolitical rivalry, and persistently high borrowing costs are collectively forging a complex headwind. "New problems keep emerging while none of the old ones is being resolved or concluded," he remarked.

On the interest rate trajectory, Ermotti was unequivocal, suggesting that the European Central Bank could be the first to launch a new round of rate hikes, with the U.S. Federal Reserve expected to follow suit, anticipating several increases over the coming months. He stressed that inflationary pressures are "still there and not showing signs of receding," admonishing investors to refrain from expecting borrowing costs to quickly return to the low-rate environment of the past.

Complacency Spreads While Risks Accumulate

Ermotti pointed out that robust investments in artificial intelligence, data centers, and emerging technologies have, to a certain degree, underpinned economic growth and financial market performance, which may partly explain why market volatility has not fully reflected the underlying risks. However, he cautioned that the macroeconomic landscape is becoming increasingly intricate. From a geopolitical standpoint, the Iran situation and the Ukraine war continue to disrupt energy prices and shipping routes; economically, U.S.-China competition is intensifying supply chain pressures, while high interest rates and stubborn inflation form a dual constraint on economic expansion. "In this kind of environment, having too strong directional views is both hard and unwise," Ermotti said.

Wealthy Investors Shift Toward Diversification but Maintain Dollar Exposure

In response to these uncertainties, high-net-worth investors are adjusting their strategies, leaning toward diversifying their bets across a broader spectrum of sectors and regions rather than engaging in large-scale directional positioning. Ermotti noted that UBS clients have, over the past several quarters, consistently pursued diversification across industries and geographies while sustaining their investment commitments to AI and technology sectors. He emphasized, however, that clients' overall asset allocation has not fundamentally changed over the past year, and this diversification trend does not signal a wholesale retreat from U.S. assets.

He mentioned observing, roughly a year ago, some capital flows moving toward global emerging markets, but characterized this as investors putting idle cash to work rather than actively trimming 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."

Central Bank Rate Hike Expectations Intensify, Elevated Rates May Become the New Norm

Regarding the monetary policy outlook, Ermotti's assessment is quite definitive: the stickiness of inflation will leave major central banks with no alternative but to continue tightening policy. He anticipates that the European Central Bank could initiate the rate hike process first, with the Fed following, and the Bank of Japan also in the mix, projecting several rate increases in the months ahead. This suggests that the market's previous optimistic expectations for rate cuts may warrant recalibration. "Inflationary pressures are still present and not diminishing, so I think it's reasonable to expect higher rates for the foreseeable future," Ermotti stated. He also noted that the sustained high-rate environment is prompting investors to adopt a more balanced approach to their portfolio construction.