2021 will be the year of ‘purposeful risk’: UBS Managing Director

UBS Managing Director Rod von Lipsey joins Yahoo Finance Live to breaks down how markets will fare in the new year.

Video Transcript

MYLES UDLAND: Bring in our next guest, Rod Von Lipsey. He's a managing director at UBS Private Wealth Management. Rod, thanks for joining this morning. You just heard us talking a bit about sort of what drove markets this year. And as you think about next year and that earnings picture-- you know, Brian Sozzi mentioned maybe earnings estimates are too conservative. Maybe there's a situation, however, in which there's a disappointment on vaccine rollout. How are you thinking about the fundamental backdrop for equities into next year?

ROD VON LIPSEY: Hey, Myles. Good morning from Washington, DC. We're really thinking that 2020 ended up being a year of accidental risk. And so we'd like our investors to really think about 2021 and have it be a year of purposeful risk for investors. And what I mean by that is, if we think about some of the things that went wrong and took us by surprise in 2020, some of them were accidental. COVID created a sell-off in areas where investors were-- really ended up being blindsided. Last March, think about the sell-off that we had initially in muni bonds and mortgage-backed securities and corporates and dividend-paying equities.

And so if you were looking a year ago going into 2020, you know, investors weren't holding 10 and 30-year treasuries as risk assets. So going into 2021, we want to make sure that we are taking some purposeful risks. And so, Myles, you talked about the equity market and the outlook for equities going forward. I think that our view would be agreeing with you, that equities are poised in the long term to be just fine. But the key is going to be being very selective on which equities, what time horizons, and what risks we want to take going into 2021.

- And there you have the opening bell at the New York Stock Exchange. Ringing that bell is Danimer Scientific, a plastics company. We'll be speaking with the CEO very shortly. Very interesting company right there. Rod, my understanding is that you and your team at UBS work on solving some serious problems for wealthy investors. You guys solve complicated. What is the biggest problem amongst your clients right now headed into 2021 that you're trying to solve?

ROD VON LIPSEY: Yeah. I think the really big question is, where is the fixed income market going? We really think that bonds are kind of problematic. As a firm, UBS, we sort of look at treasury inflation protected tips as being a most preferred asset class. We're looking for yield, and that search for yield is going to be really challenging for investors in 2021.

And so where do we look? We might see some opportunity in things like senior loans or emerging market currencies. But those are fairly esoteric asset classes. And so our investors are really quite concerned that all of the stimulus-- that the check has got to come due and the check is probably going to be paid by bondholders and maybe but certainly by taxpayers. So higher interest rates could be a challenge for us later here in 2021 once the recovery takes place, and higher taxes are probably on the horizon.

JULIE HYMAN: So Rod, that makes it sound like you think that we could potentially see rates get untethered from what the Fed does, if I'm reading you correctly, because it seems like the Fed's not going to be raising rates any time soon. So are we going to start to see a push up in rates that's sort of independent of what the Fed is doing or despite what the Fed is doing?

ROD VON LIPSEY: Well, I think that you're absolutely right. The Fed is not going to move anywhere. The Fed is going to continue to to provide the support, and it's sort of played its cards in a really wonderful way, if we think about trying to make sure that Main Street gets some protection from what we've seen in the COVID challenge. But in the bond market, I think as we go out in that five to seven, 10-year range and start looking at what we expect as investors to receive, the rates are still way too low.

And so we're seeing the market act on its own and start to expect-- and both investors and bondholders start to expect to get paid more for taking that longer term risk. I think that the conversations in the new administration and new Congress around tax policy will also give us some indications of whether or not the bond market is going to ask us to pay a little bit more for the longer duration risk.

MYLES UDLAND: You know, Rod, we're talking a lot here about the backdrop as it relates to policy and sort of broad fundamentals. But alongside this, we've seen a real investor enthusiasm around the new economy, the next big things as you've kind of termed them. What are some areas that interest you? What are your clients asking about? ESG has certainly been a big thing this year. Are you getting questions about cryptocurrency? You know, I think it's been very interesting in this early part of the cycle to see so many of these kind of moonshot ideas really come up as big parts of the conversation.

ROD VON LIPSEY: Those next ideas really are part of the conversation. And I think that the only reason that our enthusiasm has been tempered in the near term is that we still-- as Julie pointed out earlier, we still have a lot to get through. It's going to be a long, cold winter before COVID is put behind us and in the rearview mirror. But looking at those next best ideas or the big things, COVID has really dramatically accelerated things like artificial intelligence and our use of technology in finance and health, so fintech and health tech, also energy technology looking to green and the use of the internet, the proliferation, the demand for 5G technology to be rolled out and implemented. All of those are creating great investment opportunities.

And finally, you mentioned sustainability. One of the things that we've seen from COVID is that it's really made us say that we've got to think about water scarcity, food, those sorts of things that really play into sustainability of our cities and our localities. And finally, your prior guest, Victor, talked about the M&A markets. We really do see that opportunities for investors to diversify into the private markets will be exceptionally important because the amount of money and focus and attention that's going there into private M&A opportunities and deals and transactions in the year ahead.

MYLES UDLAND: All right, Rod Von Lipsey, Managing Director at UBS. Rod, great to get your thoughts this morning. Thanks for joining us. Have a great new year.

ROD VON LIPSEY: It's my pleasure. Happy new year. And we hope that 2021 will be a purposeful risk year for all investors. Thanks so much.