Amid the COVID-19 pandemic, US investors' short-term optimism has dropped sharply but long-term optimism has grown, according to the latest UBS Investor Sentiment survey.

Feeling less optimistic about the next 12 months ...

In Q1 2020 30% of investors felt optimistic about the next 12 months, 14% felt neutral, and 56% felt pessimistic; compared to last quarter 68% felt optimistic, 16% neutral and 16% pessimistic

... but more optimistic about the next 10 years

In Q12020 78% of investors felt optimistic about the long-term, 15% felt neutral, and 7% felt pessimistic; compared to last quarter 66% felt optimistic, 20% felt neutral, and 14% felt pessimistic

The survey of US investors found that those who are optimistic about the US economy over the next 12 months dropped to just 30% in the first quarter, as compared to the 68% who expressed optimism in the fourth quarter of 2019.

More than half of those surveyed in Q1 see a recession on the horizon. This is unsurprising given how COVID-19 has affected lives and economies around the world.

Interestingly, despite pessimism for the short term, investor optimism for the long term, defined as over the next 10 years, has actually increased. 78% of investors surveyed in Q1 were optimistic about the US economy over the long term, compared to 66% who felt this way at the end of 2019.

Investors aren't panicking ...

57% say they don't plan to adjust their portfolio; 33% plan to invest more; and 10% plan to decrease investments

... and many see opportunities but risk missing out

51% will wait until stocks drop another 5% to 20% more; 32% say it's a good time to buy stocks; 17% say not now, it's a bear market

For business owners, although confidence about the economy decreased 18% since Q4 of last year, more than half are still optimistic about their own business prospects. Hiring plans were also down, with 24% planning to hire in the next year compared to 37% at the end of 2019.

What is our view?

The UBS Chief Investment Office has mapped three broadly defined scenarios for the next six to 12 months:

Base case

Severe restrictions to limit the spread of the virus are lifted by mid-May in Europe and by early June in the US, but they are partially re-imposed later in the year. A coordinated monetary and fiscal response eventually provides the necessary funding to backstop affected businesses and industries, although it arrives too late to protect all. We expect a subdued U-shaped economic recovery from the third quarter of 2020 into the first quarter of 2021.

Downside scenario

Repeated outbreaks prove difficult to control, leading to severe restrictions being re-imposed intermittently. A failure to keep bond markets stable and a monetary transmission mechanism that deteriorates lead to an L-shaped economic scenario.

Upside scenario

Restrictions in Europe and the US can be gradually lifted until 3Q20, as virus outbreaks can increasingly be controlled with technological advancements and potentially better drugs. A V-shaped economic recovery takes hold.

What should investors do?

Credit Views

Within credit, we are positive on US investment grade (IG), US high yield (HY) and emerging market USD-denominated sovereign bonds. US IG bonds are at the core of the Federal Reserve's asset purchase program, and we see evidence that corporate behavior has become much more bondholder-friendly, including cuts to share buyback programs, dividends and capital expenditures.

Equity Strategies

Within equities, while we do see a path to our upside COVID-19 scenario, until we see further progress, we favor defensive and selective strategies for gaining equity exposure. In particular, we recommend focusing on resilient stocks in less-cyclical sectors such as non-discretionary consumer, companies that benefit from long-term cyclical trends and select cyclicals.

Longer-term trends

In our recent report “The decade ahead and COVID-19: Investment ideas” we identify those stocks that we see as best positioned to benefit from structural transformations resulting from the current crisis. These include ideas in the automation and robotics, e-commerce, fintech, food and healthcare industries.

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