UBS long-term theme "rebalancing": Betting on digital consumers and empowering technology, avoiding gene therapy and digital health for now.

UBS has released a research report stating that according to its long-term investment theme model, the following five major themes currently offer the most attractive investment opportunities. These five major long-term investment themes are: Digital Consumers, Empowering Technology, Diversity and Equality, Family Businesses, and Exploring New Frontiers. At the same time, the investment themes of Gene Therapy and Digital Health will face short-term headwinds, and investors should tactically step back and review their exposure in these two areas. UBS explains that in order to identify attractive entry points for long-term investment themes, the bank uses a quantitative model combined with qualitative input from theme analysts. The quantitative model is mainly based on indicators such as valuation, momentum signals, and fundamental quality. Qualitative factors include consistency with the core views of the Chief Investment Office, key risks, and potential new catalysts. The following are the five top preferred long-term investment themes identified by UBS. 1. Digital Consumers Investment logic: The younger generation are digital natives, and their consumption patterns are different from those of their parents, which also influence the behavior of their parents. Due to digitization, there are more touchpoints influencing consumer decision-making than ever before, which is rewriting the rules of online business. For young people, sharing experiences or consuming experiences is often more important than owning things. Artificial intelligence will completely change every aspect of our lives, creating new experiences. The combination of traditional fields (travel and leisure) with emerging virtual fields (e-commerce, metaverse, social media, advertising) is the key investment opportunity in this theme. Why invest now: The Digital Consumers theme ranks first among UBS's top five long-term investment themes this month, benefiting from its high quality score, as this theme involves companies with a strong balance sheet and high return on investment capital. In terms of momentum, it benefits from the stable performance of the technology sector driven by the artificial intelligence trend. However, it is worth noting that its valuation is relatively high. 2. Empowering Technology Investment logic: With generative artificial intelligence accelerating technology integration, UBS has identified five empowering technologies - artificial intelligence, augmented reality/virtual reality, big data, blockchain, and other disruptive technologies - which the bank believes will transform many industries. Excluding blockchain, UBS predicts that the market size of the other four technologies will grow at an average annual rate of 35% from $287 billion in 2022 to $32 trillion in 2030. The bank believes that artificial intelligence is likely to drive the largest incremental growth, accounting for 90% of the absolute growth in these markets (in US dollars). The bank continues to see artificial intelligence as one of the most profound technological changes of this decade, and investors will benefit most from focusing on software and semiconductor companies with strong pricing power and high entry barriers. Specifically, UBS forecasts that global artificial intelligence capital expenditure will reach $423 billion this year and grow to $1.3 trillion by 2030, implying a compound annual growth rate of 25% between 2025 and 2030. In addition, the bank has revised up its forecast for the broader total addressable artificial intelligence market size to $3.1 trillion by 2030, higher than the previous estimate of $2.6 trillion. This new forecast indicates a compound annual growth rate of 30% during the same period. Why invest now: The Empowering Technology theme remains in UBS's top five long-term investment themes due to its exceptionally high momentum score. The bank's theme leans towards the information technology sector, which has solid momentum. 3. Diversity and Equality Investment logic: UBS expects global regulatory frameworks to gradually improve information disclosure and move towards a more equitable direction, although it is unlikely to be the case for US registered companies in the near term. Setting aside regulatory changes in some regions, multiple studies show that increasing diversity can narrow wealth disparities within society, which, if true, should boost GDP in the next decade. The bank believes that companies pushing for diversity and equality throughout the value chain and processes can achieve long-term superior performance. Increased regulation, stricter scrutiny from stakeholders (socially-oriented proposals accounting for a larger proportion of shareholder agendas, covering a wide range of issues from civil rights audits to income inequality), more evidence of the benefits of diversity for companies, significant economic benefits from a more inclusive world, and overall social change are the main DRIVERS of this theme. Recently, some states in the United States have presented legal challenges to equity actions and clear focus on diversity, which may pose short-term risks to this theme as US companies need to balance the benefits of investing in their workforce with potential legal risks. However, the bank remains confident in the long-term driving factors of this theme. Why invest now: The Diversity and Equality theme still ranks in UBS's top five long-term investment themes this month, benefiting from favorable valuation and quality scores, as well as consistency with the core views of the Chief Investment Office. The theme is evenly distributed across different industries, with a good style combination of defensive, value-oriented, and growth-oriented styles. 4. Family Businesses Investment logic: Family businesses are spread globally, including both small and medium-sized enterprises, as well as larger, globally listed companies. According to market research, they make up two-thirds of the total number of global firms, contribute to over 70% of global GDP, and provide 50-80% of employment in many countries. UBS estimates that family businesses represent 20-30% of the global stock market value. The bank believes that the Family Business theme can continue to benefit from its relatively defensive positioning within the current index in terms of prudent balance sheet management and capital discipline. These characteristics should help counteract the volatility that small-cap exposure may bring. The theme's bias towards small caps can also provide a good leverage effect for economic recovery post an economic downturn. Due to their focus on quality and innovation, family businesses often provide stable growth and good risk-return characteristics. Overall, family businesses are financially conservative, with a lower ratio of net debt to earnings before interest, taxes, depreciation, and amortization compared to the overall stock market (MSCI AC World Index). Focusing on long-term vision, strong family values, and intergenerational wealth transfer goals naturally align the Family Business long-term investment theme with the concept of long-term investments with investment horizons exceeding five years. The alignment of interests between company managers and major shareholders provides a natural consistency of interests and a vision for long-term legacy building and wealth transition. Therefore, UBS believes this theme should benefit in the long run. Why invest now: This theme has higher allocations in the European market, and UBS expects European industrial activity to gradually emerge from a three-year slump by 2026. Similarly, the theme leans towards small and medium-sized companies, which often perform better during global economic recovery trends - UBS forecasts that global economic recovery will gain traction in the second half of 2026. Additionally, four of the top five industries under this investment theme are sensitive to the economy, and will benefit from better economic momentum. Furthermore, the financial prudence of family businesses can provide relative quality and downside protection in a more volatile environment, while having higher financial leverage when the economy picks up. Finally, within the global stock market context, its profitability and stock valuation scores in the model are favorable. 5. Exploring New Frontiers Investment logic: UBS believes that emerging and frontier economies will be the key engines of global GDP growth in the next decade. Population structure is a crucial DRIVER of this growth, with the top ten developing economies expected to account for over 50% of the world's population by 2024. However, UBS believes that the growth of developing economies can outpace that of developed economies for several other reasons. In order to identify which developing economies are likely to become future growth leaders, the bank also considers factors such as population structure and productivity. Finally, the bank screens for markets that can better translate GDP growth into profit growth, as rapid economic growth does not equate to a strong stock market. Given the favorable population and productivity dynamics of these markets, as well as their good track record in translating economic growth into business profitability, UBS believes that these markets - despite being inherently high-risk - offer regionally diversified allocations and potentially attractive returns. Why invest now: UBS believes that the increasing US fiscal deficit and a weaker US dollar are making emerging and frontier economies increasingly attractive. As investors seek to diversify their exposure to US assets, these markets provide attractive opportunities for expanding allocations. Additionally, the Fed's loose monetary policy should support risk assets, such as stocks in emerging and frontier markets. Finally, although the full impact of trade tensions is not yet fully clear, recent global economic data shows signs of resilience, and UBS believes that the likelihood of a full-blown recession in the short term is small. Gene Therapy and Digital Health themes face short-term headwinds Furthermore, UBS added that the Gene Therapy and Digital Health themes are currently ranked low in the bank's quantitative model, and have lower valuation attractiveness compared to other long-term investment themes covered. From a bottom-up perspective, analysts have not identified any positive short-term catalysts that could significantly improve these rankings. Specifically, gene therapy companies and the broader biotechnology industry have been facing severe constraints on capital raising, especially for small and medium-sized biotech companies. The waning of the biotechnology funding bubble that peaked in 2021 has put pressure on many early-stage, cash-burning companies. The recent strong performance of the biotechnology subsector is primarily driven by loose monetary policy and improved liquidity, prompting investors to rotate back into innovation-driven sectors. While the improvement in capital raising is a positive signal, the overall operating environment for these companies has not fundamentally changed significantly. Therefore, UBS remains cautious about the near to mid-term prospects of the Gene Therapy theme. In the case of Digital Health, after a period of upward trend, especially in the technology subsectors of this theme, the quantitative signals seem less favorable. From a fundamental perspective, UBS believes that the theme currently lacks strong positive DRIVERS. The enthusiasm of investors in 2020-21 led to excessive capital abundance in the Digital Health field, with valuations often based on high expectations of digital disruption rather than validated business models. As financial conditions remain tight, many companies face pressure to demonstrate profitability and scalability, but struggle to translate user growth into sustainable economic benefits. Due to reimbursement challenges, regulatory barriers leading to longer commercialization cycles, and a more challenging valuation environment for the sector, the adoption pace of digital health solutions has been slower than expected. UBS notes the potential value creation of artificial intelligence applications in some healthcare ecosystems (especially in diagnostics and medical service delivery/cost control areas). The bank believes that access to and control of critical patient data is essential for the monetization of artificial intelligence in the healthcare sector, but has not yet seen scalable, data-driven applications becoming significant growth DRIVERS in investable vehicles. UBS expects that as patient data and artificial intelligence applications are combined in the long term, this dynamic will improve. Overall, although UBS still believes that gene therapy and digital health will play an important role in shaping the future healthcare landscape, the bank has taken a more conservative allocation stance in the near term, at least until financing conditions stabilize and execution risks decrease.