Ouch! Friday was not a great day for equity investors. And it follows the month of August, which saw the VIX volatility index breach 45, the first time it’s hit that level since March 2009.

But UBS, the Swiss-based global bank, says investors should buck up and “stay the course,” not shifting their allocation away from equities.

UBS analyst Mike Ryan says that a return to recession for the US economy is not likely, and that, although slow growth this year and next make big gains unlikely, there is still some upside potential. (He says a broader global recession is also unlikely.)

“It remains our contention,” writes Ryan, “that stocks reached oversold conditions in August and that a further recovery from current distressed levels is likely.”  He notes that the S&P 500 is still trading at “undemanding” valuation multiples of just 11.7X the UBS estimate for 2012 earnings, and just 10.7X the 12-month consensus earnings estimate.  While he says those consensus earnings estimates are likely to be revised downward over the next few months, because of a slowing US economy, he still expects U.S. corporate profits to grow by 14% this year and 5% in 2012.

Ryan says that within the class of equities, he recommends overweighting US and emerging market equities, while underweighting non-US developed markets, “in particular in the Eurozone,” because of continuing concern about that region’s unresolved debt issues.

The UBS benchmark asset allocation is 44% equities, 37% fixed income, 12% alternative investments, 5% commodities and 2% cash.

Ryan concedes that weak economic data in recent weeks raise concerns the economy is “perilously close to recessionary levels,” and he warns that “almost any significant shock could be enough to create a U.S. recession,” but he adds that that data has been “more mixed than the headlines alone might suggest.”  For example, today’s jobs report, which showed a net no jobs created or lost for the first time since 1945, followed a report the day before by the Institute of Supply Management yesterday showing that the pace of manufacturing had increased.

Ryan also sees one perhaps wryly comic bright spot. He writes, “With expectations already set incredibly low for elected officials across the developed world, there is ample room for a positive surprise if they are able to make any progress at all in addressing fiscal concerns in the months ahead.”