Recent sharp movements across global stocks - driven in part by AI-related volatility - have led UBS strategists to reiterate the value of broad portfolio diversification as a primary defense against today’s market uncertainty. In a note to clients on Tuesday, the strategists said the previous two weeks saw pronounced share-price swings and referenced Deutsche Bank data estimating market capitalization losses in excess of $1 trillion.
Unlike earlier episodes of turbulence that were concentrated in technology and communications services, the strategists said the latest repricing has been more diffuse, touching sectors such as software, legal services, logistics, insurance, and commercial real estate. Against this backdrop, UBS argued that "with more broad-based volatility comes the renewed need for portfolio diversification, a principle whose efficacy is supported by decades of empirical research."
UBS underlined a statistical reality: no single asset class consistently dominates across all market cycles. The bank noted that while the MSCI AC World Index produced three consecutive years with returns above 20% through 2025, such extended streaks are historically uncommon. That unevenness in performance is part of the rationale for holding multiple asset classes.
To illustrate long-term contrasts, UBS presented historical return comparisons: between 1926 and 2025, a single dollar invested in U.S. equities would have grown to about $21,000, compared with roughly $110 for medium-dated U.S. government bonds and about $25 for U.S. dollar cash. The bank emphasized, however, that equity gains did not follow a steady upward path. After the 1973 oil shock, for example, the S&P 500 required 6.6 years to recover to its prior peak.
"This volatility highlights the importance of holding multiple asset classes to smooth returns and reduce drawdowns," the UBS strategists wrote. The commentary was attributed to the team led by Ulrike Hoffmann-Burchardi.
Correlation patterns are central to diversification’s effectiveness. UBS cited 15 years of data showing that 1-5 year U.S. government bonds have historically produced modestly positive returns for U.S. investors during stretches when international equities declined. That complementarity has helped portfolios offset losses in other assets.
At the same time, UBS warned that correlations are not fixed. They can change across different market regimes, which means diversification strategies require ongoing monitoring and periodic adjustments. The bank also recommended diversifying across investment philosophies. For instance, systematic strategies that rely on statistical models can dynamically alter allocations and may limit behavioral biases that affect discretionary decision-making.
UBS drew a clear distinction between diversification and hedging. Proper hedging entails holding assets or instruments whose payoff profiles are constructed to gain when the reference assets fall. The strategists noted that persistent negative correlations among major asset classes are uncommon, so diversification by itself should not be considered an effective hedge against large downturns.
Summary
Heightened AI-driven volatility and a broader sectoral repricing have prompted UBS to reassert diversification as a core risk-management tool. The bank highlighted recent market-cap losses of more than $1 trillion and emphasized that historical data do not point to any single asset class as a perennial winner. While diversification can smooth returns and reduce drawdowns, UBS cautioned that correlations shift over time and that true hedges require instruments designed to appreciate when reference assets lose value.
Key points
- Market moves over the past two weeks included sharp swings and estimated market-cap losses above $1 trillion, according to Deutsche Bank data cited by UBS.
- Recent repricing has been broad-based, affecting software, legal services, logistics, insurance, and commercial real estate, rather than being limited to tech and communications services.
- Long-term historical contrasts show wide dispersion in asset-class returns - $1 in U.S. equities growing to about $21,000 between 1926 and 2025 versus roughly $110 for medium-dated U.S. government bonds and $25 for cash - supporting the case for multi-asset allocations.
Risks and uncertainties
- Correlations across asset classes can change across market regimes, reducing the effectiveness of static diversification and requiring regular portfolio review - relevant to equities, bonds, and international assets.
- Diversification alone is not a substitute for hedging, since persistent negative correlations among major asset classes are rare; portfolios may still suffer meaningful drawdowns during broad selloffs, affecting sectors like commercial real estate and insurance.
- Historical recoveries can be protracted - the S&P 500 took 6.6 years to regain its previous peak after the 1973 oil shock - indicating prolonged periods of underperformance are possible for equities.