New CIO scenarios & asset class outlook

Discover the latest UBS Global Risk Radar.

10 Aug 2020

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.

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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.

Central scenario

In our central scenario, we expect no renewed nationwide lockdowns. Moderate restrictions on activity should be sufficient to keep outbreaks manageable, with a vaccine widely available from 2Q 2021. This, combined with expansionary monetary policy and a moderate increase in fiscal stimulus, should allow for a rebound of economic activity to pre-pandemic levels by 2022. Against this backdrop, and with yields anchored close to record low levels, we think that the equity risk premium can normalize to pre-pandemic levels and would project the S&P 500 to trade at 3,500 by end June 2021. Our preferred investments for this scenario include dividend stocks, assets exposed to a 'green recovery', and select credit opportunities.

Upside scenario

In our upside scenario, we think a combination of earlier-than-expected vaccine availability, increased fiscal stimulus, status quo in US-China relations, and a 'benign' (from a tax and regulation perspective) outcome to the US presidential election would lead to equity risk premia falling below pre-pandemic levels, and we would project the S&P 500 to trade at 3,700 by end June 2021. Our preferred investments for this scenario would include select cyclicals and value stocks, and companies exposed to themes accelerated by the pandemic (such as digital transformation). We would also expect further dollar weakness.

Downside scenario

In our downside scenario, we would expect the S&P 500 to trade at 2,800 by end June 2021. We think that gold and the Swiss franc are among the best potential hedges for this scenario. In this scenario, investors would also need to look for opportunities to take advantage of volatility.


Investment implications

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.

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