Sovereign Note: Positioning for a post-pandemic world

When it comes to Covid-19, the situation continues to evolve and we have now entered a new phase, which requires us to review the current situation from a high-level perspective. We think that currently the spread and control of the virus, as well as the policy response are marked by a fundamental shift towards herd-immunity strategies and the easing of social restrictions. In this phase, the management of the transition from a pandemic to an endemic situation becomes crucial and countries that have been running zero Covid-19 strategies might have to review their re-opening strategies while considering new highly-infectious variants. The varying effectiveness of different vaccines might also become more visible going forward, and it will be necessary to monitor the social consensus that will form around levels of casualties that are acceptable before new restrictions might be imposed.
 
In the light of this as well as due to recent developments in the global economy, UBS Asset Management has also updated its 5-year Capital Market Assumptions framework that covers a wide range of asset classes. Global Sovereign Markets - Strategy & Advice has once again calculated the 5-year expected returns for a number of sovereign sample portfolios which we think are representative of the investment behavior of central banks and long-term sovereign saving funds. We now consider the possibility of a High Growth and Inflation scenario where the massive shift toward a digital economy that occurred during the pandemic would lead to a period of strong growth rates. With still ample stimulus in the system, inflation would rise faster than expected, amplified by labor shortages and supply chain bottlenecks.