Market scenarios and risks
In our 2021 Year Ahead outlook report, we identified three potential sources of market setbacks this year: economic policy, the pandemic, and geopolitics. While all of these risks remain valid and deserve close monitoring, the needle has moved in the right direction, in our view. For example, the new US administration has signaled its willingness to pass a large fiscal stimulus package; the vaccine rollout has accelerated in many countries (with some notable exceptions in continental Europe) and is showing early signs of success in lowering hospitalization rates; and US President Joe Biden has reaffirmed the importance of global alliances, easing worries about the continuation of a unilateral approach toward global trade and diplomacy.
CIO holds a risk-on bias in its tactical asset class preferences. In our base case, we expect the vaccine rollout to accelerate in developed countries, allowing restrictions to be lifted more sustainably in the second quarter. Both monetary and fiscal policy should remain accommodative. In the US, for example, we expect the Biden administration to pass a fiscal package of over USD 1tr through reconciliation over the coming weeks.
With key market drivers falling into place, equities have the potential to generate high single-digit returns this year. Returns on fixed income should be in the low single digits, driven mainly by carry rather than a further narrowing of spreads. We also expect the US dollar to weaken further against the euro.
But there are many risks to this view. Key among them is uncertainty around virus mutation and the vaccines' ability to protect against illness from new strains. Surprises on this front will have a bearing on policymakers’ reaction function toward economic reopening.
Another risk is increasing optimism in the market itself. While volatility markets are showing signs of cautiousness, asset prices are increasingly accounting for a brighter investment environment, as clearly seen in near-record-high equity prices in developed countries.
For more on the scenarios outlook and investment implications, download the full report.
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