Backdrop

In this paper we provide two sets of analyses of the possible outcomes over the next five years.

As the pandemic crisis resolves, some industries may quickly bounce back to something very recognizable. Other industries – such as airlines, cruise lines, hotels, restaurants, sporting events, theater, concerts, and public transportation – may be impaired for a lot longer as we struggle to find a new balance. The impact on real estate is uncertain. Certainly, there is a short term hit to some sectors (namely, high density urban centers) and a benefit to others (suburban office parks), but we doubt the hit will be permanent in these real estate categories. The density of urban centers may decrease, but we believe that they will always have a certain dynamic element to them because of the economies of scale and high networking benefits.

Balancing disruption is innovation. We already see the creation of new businesses and models from low tech to high tech: personal protection equipment (masks and plexiglass panels), video conferencing, and telemedicine. Moreover, interest in the biosciences has increased and new supply chains will be built.

One key drag on growth will be the continued deglobalization that began in the mid-2010s. A huge wave of globalization started in the post-WWII reconstruction period and was sustained by a series of positive shocks: for example, the fall of the Berlin Wall in the late 1980s and the entry of  China into the WTO in the early 2000s. However, after the Global Financial Crisis (GFC), the appeal of free trade and immigration faded and reversed in the mid-2010s. At a minimum, we expect further deglobalization with tighter border controls and movement of strategic supply lines closer to home markets. In the long run, we believe that the drop in the expected growth rate will be minimal because there has been no destruction of physical capital and human capital  has not diminished, though it may take quite a while for the markets to absorb and reallocate both factors.

Another drag on growth in the short run is the growth of precautionary savings by households. A lot of people will likely spend less and we already see the savings rate rising as they build a reserve fund for emergencies. This should put pressure on short term rates to stay low as this stock gets build up. Offsetting this are corporations which are systematically dissaving.

The pro-active policies of the central banks in an effort to stabilize the credit markets have been a substantial development. Credit spreads immediately tightened and inspired rebounds in the equity market before any of these facilities were operational. This response has taken some of the refinancing risk and solves several liquidity problems, but many firms have long-term solvency issues that only an orderly restructuring can resolve.

Finally, the huge increase in government deficits across the globe is a natural reaction to the resulting slowdown from the COVID-19 pandemic, though perhaps unprecedented in size and speed. The market is pricing in very little inflation risk premium. But this could change; for example, if policymakers over-stimulate amid supply-side constraints, inflation pressures could emerge.

Read more

 

Asset Management services and solutions in your location

Please select your region

 

For further information on what we can offer you, please get in touch.

Important legal information

To proceed, please confirm that you are a professional / qualified / institutional client and investor.

Views and opinions expressed are presented for informational purposes only and are a reflection of UBS Asset Management’s best judgment at the time a report or other content was compiled. UBS specifically prohibits the redistribution or reproduction of this material in whole or in part without the prior written permission of UBS and UBS accepts no liability whatsoever for the actions of third parties in this respect. The information and opinions contained in the content of this webpage have been compiled or arrived at based upon information obtained from sources believed to be reliable and in good faith but no responsibility is accepted for any errors or omissions. All such information and opinions are subject to change without notice but any obligation to update or alter forward-looking statement as a result of new information, future events, or otherwise is disclaimed. Source for all data/charts, if not stated otherwise: UBS Asset Management.
Any market or investment views expressed are not intended to be investment research. Materials have not been prepared to address requirements designed to promote the independence of investment research and are not subject to any prohibition on dealing ahead of the dissemination of investment research. The information contained in this webpage does not constitute a distribution, nor should it be considered a recommendation to purchase or sell any particular security or fund. The materials and content provided will not constitute investment advice and should not be relied upon as the basis for investment decisions. As individual situations may differ, clients should seek independent professional tax, legal, accounting or other specialist advisors as to the legal and tax implication of investing. Plan fiduciaries should determine whether an investment program is prudent in light of a plan's own circumstances and overall portfolio. A number of the comments in the content of this webpage are considered forward-looking statements. Actual future results, however, may vary materially. Past performance is no guarantee of future results. Potential for profit is accompanied by possibility of loss. 
© UBS 2020 The key symbol and UBS are among the registered and unregistered trademarks of UBS.

Reset