Change? Or more of the same…

As we look towards 2021, how can investors generate income and turn volatility into opportunity in their search for yield?

24 Nov 2020

2 min read

Barry Gill

Head of Investments

As 2020 draws to a close, and we turn our focus to the upcoming investing year, it is tempting to be biased by recent experience and assume that shock and volatility are here to stay; this is part of the human condition.

But when one parses this year it actually becomes clear that the virus and the associated economic lockdowns did more to entrench existing trends than to invert them. It proved an accelerant on internet disruption, which served to exacerbate well-entrenched service industry disinflation. And this in turn heavily influenced global bond yields which are currently plumbing previously unimaginable lows.

While we have clearly experienced a profound recession and an accompanying bear market, from an investor’s perspective it has felt very different to prior economic downturns in that the impacts have been so lopsided. Many companies are on their knees, but some parts of the economy have actually never had it better, leading to incredible dispersion in equity returns and credit spreads. And the rebounding equity market should remind us all that stock valuation is as much about the discount rate as it is about earnings.

Many companies are on their knees, but some parts of the economy have actually never had it better, leading to incredible dispersion in equity returns and credit spreads

But with world equity indices back within reach of record highs and government bond yields below 1% in every major economy other than China, the challenge to outrun liability growth is greater than ever for many of our clients, particularly those who have annual obligations. How to generate income in a world bereft of yield is the primary focus of this edition of Panorama: Investing in 2021, and we lean on several of our internal experts to look at this challenge from a variety of perspectives and to consider the opportunities across asset classes.

Our Fixed Income portfolio managers encourage our clients to seek yield by adding exposure to Asia and China in particular, while our Quantitative Investments team points to high dividend opportunities in the equity markets. The CIO of O’Connor discusses why the timing is right to allocate into multi-strategy hedge funds, particularly as an income substitute.

We shed some light on another probable outcome of the current low yield environment, that the traditional diversification benefits across the asset classes will likely break down, with views from our Multi Asset team. They make the case for seeking to improve on that dynamic by allocating into private markets, something that is backed up by our Real Estate & Private Markets team as they explore the opportunities available from infrastructure investing. We believe that infrastructure should be a prime beneficiary of the economic stimulus packages and low interest rate environment spurred by the pandemic.

Elsewhere, we explore the potential ramifications of the US election, the outlook for small caps, and the limitations of Artificial Intelligence for fundamental analysis. And we round it all off with an examination of the sweeping EU regulation on sustainability-related disclosures.

I hope you find our year end update both informative and provocative. Please don’t hesitate to contact your UBS Asset Management partner should you seek further insight.

We look forward to our continued partnership with clients throughout the next year.

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