Equity markets are likely to continue heading sideways for the immediate future, due to weak investor sentiment and rising interest rates, according to Swiss-based banking giant UBS.

The firm released its latest results today, reporting that second quarter profit dropped 19% from the prior quarter; although, this left profits up 28% from the same quarter a year ago. “After the very favorable business environment seen in first quarter 2004, the second quarter saw a slowdown in pace as equity investors became less active, and rising interest rates and low volatility drove volume out of the fixed income markets,” it noted.

“Halfway through 2004, we can see that the markets’ astonishing start to the year has settled into a more normal rhythm. In that context, this was a good quarter for UBS, demonstrating the importance of having the world’s leading wealth management operation as a central part of our focused strategy,” said Peter Wuffli, the firm’s chief executive officer.

“This quarter, strong asset-based fees from our wealth management and asset management franchises, alongside the progress of our corporate client franchise, have helped us to balance lower securities revenues,” added Clive Standish, chief financial officer.

The firm’s wealth management group actually grew pre-tax profits by 1% sequentially, to their highest level since 2001. Although, the U.S arm of its wealth management business was on the weak side, with pre-tax profit in that group down 14% before acquisition costs. It says that the fall in performance mainly reflects lower transactional revenues. Average daily trading volumes fell 10% in second quarter from the relatively strong first quarter, as investor activity slowed.

Looking ahead, the bank says that, “While investor sentiment has recovered from the very low levels of last year, it still remains subdued. Combined with directionless markets and the expectation of rising interest rates, this may continue to dampen levels of market activity.”

“Since many of our businesses, especially our investment bank, have activity as an important driver, we should expect a return to a more normal seasonal pattern this year, with second half revenues not matching those in the first half,” said Wuffli.

http://www.ubs.com/e/media_overview/media_americas/news/20040810a.html