At a glance
With progress in COVID-19 treatments and vaccines, and evidence of recent outbreaks fading, market focus is gradually shifting to market drivers beyond the pandemic. The upcoming US election, US-China relations, and traditional economic trends are all slowly coming back to the fore. Our new central scenario envisions localized and manageable COVID-19 outbreaks in autumn, some deterioration in US-China relations within the boundaries of the Phase 1 deal, and no political gridlock in the US following the November presidential election. A major second wave of the coronavirus remains our main downside scenario. We invite you to explore our updated scenarios for the next six to 12 months and how we see the global economy and markets going forward.
Scenario review and outlook
Global financial markets have rebounded strongly from their March lows when fears about the COVID-19 health crisis peaked. For example, the S&P 500 index has risen more than 45% since then and has almost fully recovered to pre-pandemic levels. In our latest Global Risk Radar, we review our current set of scenarios, provide an outlook on what may drive markets and update our asset class targets across central, upside and downside scenarios.
Overall, while we believe elements of the COVID-19 story will continue to play an important role in determining asset prices over the next 12 months, other factors may increasingly come to the fore. These factors include the upcoming US election, US-China tensions, and the outlook for real interest rates and company earnings.
Given unprecedented monetary stimulus and our outlook for COVID-19 and vaccine availability, we maintain an overall risk-on asset allocation expressed through a preference for global equities and various credit segments (for more details please refer to our latest CIO Monthly publication).
Our new equity forecasts rest on the following assumptions:
- Real rates will remain negative longer than we had previously expected
- We now believe equity risk premia can compress further.
- We expect earnings revisions to turn positive quicker than we previously thought.
In terms of other asset classes:
- We see the price of gold climbing into the year end, as rising inflation expectations (lower US real rates) and USD weakness lifts the asset class.
- On the credit side we believe developed market credit has mostly priced in the recovery, while emerging market credit has room to catch up.
- As economic recovery accelerates next year and the Fed likely continues to provide stimulus through zero-rate policy and asset purchases, we expect EURUSD to test and overcome the 1.20 level.
For more investment implications, download the full report "Global Risk Radar: New CIO scenarios & asset class outlook" below.
Global risk radar: New CIO scenarios & asset class outlook
Dive deeper into the four key market drivers over the next six to 12 months. Get your copy of our latest UBS Global Risk Radar report.