2021: A calm after the storm?

Discover the latest UBS Global Risk Radar.

13 Nov 2020

At a glance

The COVID-19 pandemic has caused irreversible socioeconomic changes on a global scale. However, the post-pandemic world of 2021 still promises a return to some form of normalcy. We believe next year will bring back more traditional market risks, and we expect three main risk topics to dominate. First, recovery from the COVID-19 pandemic. Second, economic stimulus and its effects on growth and inflation. And third, geopolitics, with an emphasis on foreign policy under the new US administration. Discover what the three topics mean for your portfolio and explore our updated market scenarios and investment implications.

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Three risk themes in 2021

Throughout 2020, ups and downs in market uncertainty could be easily attributed to developments around one of two topics: COVID-19 and, more recently, the US election. In March, equities experienced a record pace to reach bear market territory as fears around the pandemic peaked. The decline was followed by a similarly record-fast rebound as governments deployed unprecedented monetary and fiscal measures to battle the economic fallout. Market volatility reached the highest level since the global financial crisis (GFC) in 2008 and then declined, but it remains elevated due to US election uncertainty and the economic consequences of renewed virus outbreaks.

In 2021, we expect markets to gravitate back toward more "traditional" risks. Globally, we expect the following three risk themes to dominate:

Pandemic recovery

Until an effective vaccine for COVID-19 is in wide circulation, renewed virus outbreaks and further lockdowns remain an ongoing risk. Recent efficacy data from the Pfizer and BioNTech vaccine has been a positive surprise for markets. If and when a highly effective vaccine becomes widely available, it is likely that COVID-19 will stop posing a major risk to healthcare systems and the global economy. Our base case foresees wide-scale availability of such a vaccine in 2Q21. This means social activity could fully normalize by 3Q21, and developed economies could recover to pre-pandemic GDP levels by 2022. But in the meantime, ongoing outbreaks in Europe and the US, and potential further outbreaks elsewhere, still need to be managed by other means such as restrictions on economic activity. In our view, this means that investors should start positioning for the upside in a post-pandemic world, but remain cognizant of the near-term risks that may warrant some hedging.

Economic policy

Fiscal and monetary policy will remain a key driver for financial markets in 2021. In our base case, continued monetary and fiscal support should allow growth to recover throughout the year, with inflation increasing moderately and real interest rates staying negative. In the likely case that President-elect Joe Biden has to work with a Republican majority in the Senate, the ability to pass the full Democratic fiscal plan seems limited. However, we still expect a sizable package of around USD 500bn to USD 1tr, or 2.5–5% of GDP, to support economic growth. Similarly, the latest accommodative policy actions by the Bank of England (more asset-buying) and the Bank of Australia (lower policy rates), and the outlook for more quantitative easing by the European Central Bank, reaffirm our base-case view of open-ended monetary accommodation for the time being.

In our downside scenario, fiscal spending may prove less effective than expected, and inflation could increase more meaningfully while growth remains sluggish.


One major political event of 2020 is likely to have major ripple effects throughout 2021: the US presidential election. While Joe Biden will most likely be the 46th US president, three questions remain:

1. What will a Biden presidency mean for US foreign policy?

A Biden presidency will likely lessen the uncertainty around US external policy. The approach and tone of the president-elect will likely be more collaborative and targeted, and, most important for markets, less volatile than President Donald Trump’s. In general, the former vice president seems to favor a multilateral approach to foreign relations over a unilateral one. Furthermore, the new administration might be more reluctant to use tariffs as a trade policy tool. As a result, CIO expects no significant increase in US-China-Europe tensions in the near future. That being said, it is important to stress that a significant shift on trade policy with the new administration is unlikely, and US-China relations remain a long-term issue in our view.

2. Can the election be successfully contested by President Trump?

Some votes will be recounted and President Trump has not yet publicly conceded, but we think the extent of President-elect Biden’s lead in the reported results leaves little doubt about the ultimate outcome of the presidential race.

3. Is there a chance Democrats take control of the US Senate?

With neither the Republican nor Democratic candidates achieving 50% of the votes in the two Senate races in the state of Georgia, the seats will be decided by a runoff election in January. We think it is most likely that Republicans will control the Senate with a one- or two-vote majority However, equity markets could begin to react if the race gets closer in the coming weeks, which could lead to higher bond yields, relative underperformance for secular growth names relative to cyclicals, and outperformance for greentech stocks relative to traditional energy names.


Market scenarios and investment implications

Overall, despite the recent market rally, we continue to believe that stocks will move higher from here. The S&P 500 is moving closer toward our central scenario target of 3,800 by June 2021. However, in our upside scenario, we would expect to see the S&P 500 trading at 4,000 by June. Latest vaccine news reduces the downside risk of no effective vaccine being deployed in 1H21, while making the upside scenario look more likely. In our upside scenario, we would also see credit spreads tighten further, the USD weaken, and the gold price decline.
We maintain a preference for equities over high quality bonds, and reiterate our view that investors should:

  • diversify within equities for the next leg higher
  • use sell-offs to build exposure to the green agenda
  • look for secular growth beyond COVID-19
  • build long-term positions (read more in the CIO Monthly publication).

For more on the scenarios outlook and investment implications, download the full report below.

Global Risk Radar "2021: A calm after the storm?"

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