Uncertainty over the trajectory of the coronavirus pandemic prompted Mark Haefele, UBS’s chief investment officer, to provide three main investment strategies, depending on the different recovery scenarios. Haefele also said that the United States is at a key crossroads – with long-term risks from the virus, renewed tensions between the United States and China and high ratings threatening to drag markets back to the bottom of March.
On the other hand, positive news from coronavirus vaccine attempts has raised investor sentiment in recent weeks. Uncertainty over limiting the pandemic is a key variable in bringing markets out of their current narrow range, Haefele said.
“In order for markets to catch the ‘second wave’, investors need more confidence that the ‘literal second wave’ of viral infections will not lead to a resumption of economic blockades,” he wrote. “Even if current economic conditions are weak, markets are promising and are likely to trade higher if investors gain confidence that the economy will recover steadily.”
The best short-term strategies depend on how the economic recovery is going. The three scenarios and market guidelines highlighted by Haefele are described below:
UBS’s upturn scenario envisions the economy recovering in May and June without the need for a second blockade. Market countries that are lower than the worst of the pandemic would be of significant value and would be better solutions in terms of growth, Haefele said.
Both cyclical and value stocks would be best positioned for a better-than-expected recovery. US mid-cap companies have not targeted the trend of staying at home as fast as their older peers, leaving them better prepared to win back to past norms. Relieving mobility restrictions will help carmakers, food and beverage manufacturers and retailers in particular, according to the CIO.
For those who are seeing a shift to value stocks, the place to be is the severely affected energy sector. The rise in oil demand has been able to lift the entire segment, and US energy stocks are already reflecting rising commodity prices, which are currently “well below our long-term normalized price expectations,” Haeffle said.
Investors need to watch out for a weaker dollar if the economy rises to previous levels of growth. As the currency appreciated during the crisis, the decline in liquidity demand will reduce the value of the dollar to a lower one. The British pound is the best currency for currency trading against the dollar in such a scenario, said UBS.
Haefele’s main scenario projects economic recovery, which takes place in the summer and economic activity returns to previous peaks in December.
The more moderate recovery puts credit bets in a healthy place compared to stocks, writes CIO. Investment grade debt, emerging market bonds and high-yield credit are well positioned for profits thanks to broad government relief, he added.
“Policy makers have done enough through their fiscal and monetary response to ensure that liquidity problems do not turn into solvency problems for companies or government institutions that were viable before the crisis,” Heifele said, adding that direct Purchase of Fed corporate bonds further raises the asset class.
Even if the recovery is not as fast as desired, UBS’s baseline scenario creates long-term opportunities in the healthcare, e-commerce, automation and cybersecurity sectors. Sustainable investment is likely to be preferred, with investors paying more attention to green and socially responsible companies, according to the bank.
The descending scenario.
Haefele does not offer such a clear picture of what his pessimistic scenario would look like, but instead hints at fresh credit shocks and sharp instability penetrating the markets.
In the event of a prolonged recession, a safer bet for investors would be to follow historically successful hedge funds. Active stock picking could help “target periods of volatility” better than passive stock and bond positioning, the CIO said.
Rising US debt, tight financial conditions, rising geopolitical risks and the devaluation of the dollar would do wonders for the price of gold, UBS added. The precious metal is already enjoying increases to eight-year highs, and even in the main case, the bank expects gold to gain another 4% to $ 1,800 an ounce by the end of the year, as in a downward scenario the price will increase further.
Junior Trader Radi Djuma