2020 mid-year outlook Plotting the path to recovery

A short, sharp shock or prolonged pain? We explain why our base case is for gradual, uneven economic recovery from the COVID-19 outbreak.

01 Jul 2020

… our base case, given that uncertainty, is for a gradual, uneven economic recovery … Consumer spending recovers, but fails to eclipse pre-COVID-19 levels.

Evan Brown, Head of Multi-Asset Strategy
Ryan Primmer, Head of Investment Solutions

A short, sharp shock or prolonged pain? We lay out the possible narratives for a bull, base and bear case for the post-pandemic recover. Our base case given the uncertainty is for a gradual, bumpy recovery. For investors, this requires a balancing act to protect against a possible protracted downturn and identifying opportunities for asymmetric upside should a proven vaccine allow for a more enduring rebound. How do we plot our asset allocation matrix for this balancing act?


 

Initially a 'V' shaped bounce then a Nike 'swoosh'

The opening act of the 2020s may have produced the event that defines the decade. An immense human toll and financial market upheaval linked to the COVID-19 pandemic turned every prediction for the year upside down. An unparalleled shutdown of global economic activity occurred, soon answered by policy support and mass doubt about the long-term future of work as well as social interactions.

Real GDP across scenarios

Public health, fiscal outcomes will determine the shape of the recovery

Real GDP forecasts in different scenarios of a bull market, stagflation, current baseline and 2019 levels

We believe the most powerful determinant of economic recovery will be the development of a still-elusive vaccine or proven treatment protocol, followed by a government pivot from providing a cushion to stimulus.

Bull

  • Swift progress on vaccines/ treatments facilitates broad reopening of activity.
  • Governments pivot from income support for locked-down economies to initiatives that enhance the speed of the recovery.
  • Monetary policy remains highly supportive of both markets and the economy.

 

Base

  • Gradual recovery begins as economies reopen, with the strength of the local public policy response to the crisis determining relative outperformers.
  • Conservative Chinese stimulus limits extent of global cyclical upturn in activity.
  • Consumer spending recovers, but fails to eclipse pre-COVID-19 levels.
  • Meager rebounds in capital spending, global trade.

Bear

  • Premature fiscal retrenchment in US; EU recovery plan proves underwhelming.
  • Material second wave of infections forces return to lockdowns.
  • Geopolitical, trade, or US election risks increasingly weigh on economic outlook.

Three potential scenarios for the global economy post COVID-19 including a bull, base and bear case


 

A gradual, bumpy recovery

Therefore our base case, given that uncertainty, is for a gradual, uneven economic recovery. Capital spending is likely to stay in the doldrums in this highly uncertain backdrop, and the scope for households reducing saving rates is limited.

There is an upside scenario in which a faster than expected arrival of an effective vaccine allows for a comprehensive economic reopening, with governments nimbly turning to stimulus spending. Conversely, a downside case consisting of a second wave of COVID-19 that forces a return to economic lockdowns or the premature withdrawal of fiscal support amid continued private retrenchment lies within the range of possible outcomes. We intend to stay flexible to capture these relative value opportunities as they appear.

There is an upside scenario in which a faster than expected arrival of an effective vaccine allows for a comprehensive economic reopening.

COVID-19 drove equity volatility to financial crisis levels

Volatility in equities surged this year to levels not seen since the global financial crisis in 2008/2009


 

A balancing act

Asset allocation in any of these scenarios requires striking a delicate balance between fiscal and monetary support already deployed by central banks and governments to alleviate the economic damage, protecting against a possible protracted downturn and tepid recovery, and identifying opportunities for asymmetric upside should a proven therapy or vaccine allow for a more enduring rebound.

We retain exposure to themes and geographies that we believe stand to gain the most from an upswing, while limiting our overall risk if a more pessimistic scenario comes to pass.

Risk assets around the world have enjoyed substantial rallies since late March, as initial policy enthusiasm was followed by incremental progress on both public health outcomes and economic activity across the developed world. Nonetheless, in our base case scenario, lingering safety concerns will keep demand and capacity below pre-COVID-19 levels in 2020 and beyond.

Example of COVID-19-driven supply/demand imbalance in China

The supply and demand imbalance in terms of industrial production and retail sales in China

In the US, the potential end of enhanced unemployment benefits in July and looming austerity at the state and local government level constitute potential risks to the US economy. The importance of US consumption and the depth of the nation’s capital markets suggests that the policy response stateside will play an outsized role in mapping out the magnitude and contours of the global macroeconomic bounce as well as financial market performance.

Intense stress on firms, including a rash of bankruptcies during the economic standstill, has severed the links between employee and employers, introducing a source of friction that may prevent an immediate healing of labor markets and, in turn, consumption.

The Federal Reserve’s swift policy support for credit markets and commitment to ultra-low policy rates is only one factor to consider. The potential for market-unfriendly tax and regulatory changes that would come with a Democratic win of the presidency and both houses of Congress in the November presidential election may command more attention as the vote nears.


 

Where does this leave us?

Policy support in Japan is ample, with the combination of highly accommodative central bank support and the government’s recent doubling of an assistance package. The deployment of monetary and fiscal easing goes back to the advent of Abenomics, a period associated with superior local returns.

China and Korea, which suffered from virus outbreaks before their emerging market counterparts, could outperform that cohort due to their status as the first to stabilize activity and implement strong contact tracing infrastructure. Dollar-denominated emerging market debt, particularly Asian countries, represents another area in which relative returns are skewed to the upside should risk appetite remain resilient.

The fiscal policy response from Beijing, meanwhile, is designed to do what is sufficient to support employment—but not much more.

An asynchronous snapback across nations will weigh on the ability of the world’s second-largest economy to capture a meaningful impulse from global demand; so too will China’s relatively limited fiscal thrust to date reinforce slower activity around the world.

Tensions between China and the US have also re-emerged on a number of fronts, including both the COVID-19 pandemic and Hong Kong’s status. An eventual reckoning on these issues threatens to fuel volatility not just in Chinese markets, but globally as well. Tactically, we believe the status of the phase one trade deal will stay at the forefront as a driver of local returns.

Markets have shown a relative inability to adequately price nebulous financial risks compared to well-defined disruption to the terms of trade. Nevertheless, we are underweight cyclical North Asian currencies against the safe haven Japanese yen, to hedge against an escalation of tensions or downside surprise in global growth.

We believe the status of the phase one trade deal will stay at the forefront as a driver of local returns.

The rest of the emerging markets cohort is likely to be weighed down by lackluster global growth and trade, with the conservative Chinese fiscal response offering less of a lift for this group compared to prior periods of fiscal loosening. Despite this, the cupboard is by no means bare when it comes to the opportunity set in emerging markets, including selective undervalued currencies.

Our risk exposures are designed to capitalize on opportunities with asymmetric upside amid a successful thawing of the global economy, guided chiefly by attractive valuations.

We will be guided by the knowledge that reopening is a necessary but insufficient prerequisite for a return to full economic health. In addition to breakthroughs in the medical field, public policy decisions will be instrumental in deciding the character — whether it be a V, a U, most likely in our view, a Nike ‘swoosh’ — that defines the shape of differing recoveries, as well as that of the world at large.

The shape of the recovery

The shape of economic recovery – will it be u-shaped, w-shaped or v-shaped.

Mid-year outlook 2020 A short, sharp shock or prolonged pain?

More insights

Singapore Retail Investors

PLEASE READ THESE TERMS AND CONDITIONS CAREFULLY BEFORE PROCEEDING. BY UTILIZING THE WEBSITE AND PAGES THEREOF LOCATED AT WWW.UBS.COM/AM-SG ("WEBSITE"), YOU ACKNOWLEDGE THAT YOU HAVE READ THESE TERMS AS WELL AS THE GLOBAL TERMS OF USE (collectively "TERMS") AND THAT YOU AGREE TO BE BOUND BY THEM. IF YOU DO NOT AGREE TO ALL OF THE TERMS OF THIS AGREEMENT, YOU ARE NOT AN AUTHORIZED USER OF THESE SERVICES AND YOU SHOULD NOT USE THIS WEBSITE.

This website is not intended for and should not be accessed by persons located or resident in any jurisdiction where (by reason of that person's nationality, domicile, residence or otherwise) the publication or availability of this website is prohibited or contrary to local law or regulation or would subject any UBS entity to any registration or licensing requirements in such jurisdictions. It is your responsibility to be aware of, to obtain all relevant regulatory approvals, licenses, verifications and/or registrations under, and to observe all applicable laws and regulations of any relevant jurisdiction in connection with your entrance to this website. Each investment product and service referred to on this website is intended to be made available only to residents in Singapore.

UBS reserves the right to change, modify, add or remove content on the website as well as these terms at any time for any reason without notice. Such changes shall be effective immediately upon posting. You acknowledge that by accessing our website after we have posted changes to these terms, you are agreeing to these terms as modified.

The materials on this Website are distributed by UBS Asset Management (Singapore) Ltd (company registration number: 199308367C), which is licensed by Monetary Authority of Singapore ("MAS") in Singapore pursuant to the Securities and Futures Act (Chapter 289 of Singapore). UBS Asset Management (Singapore) Ltd is part of the Asset Management business division of UBS Group AG. UBS Asset Management (Singapore) Ltd together with UBS Group AG and its group companies shall collectively be referred to as "UBS".

The information contained in this Website has been prepared and is intended for general circulation. The information does not constitute advice and does not take into account the specific investment objectives, financial situation, or particular needs of any particular person. The investment services or products referred to in this Website may not be suitable for all investors. UBS recommends that you independently evaluate particular investments and strategies and seek independent advice from a financial adviser regarding the suitability of such investment products, taking into account your specific investment objectives, financial situation and particular needs, before making a commitment to purchase any investment products. Investment involves risks. You should be aware that investments may increase or decrease in value and that past performance is not indicative of future performance.

The information contained in this Website is not an offer to buy or sell or the solicitation of an offer to buy or sell any investment product or to participate in any particular trading strategy. UBS, its officers and/or employees may have interests in any of the investment products referred to on this Website by acting in various roles. UBS, its officers and/or employees may receive fees, commissions or other benefits for acting in those capacities. In addition, UBS, its officers and/or employees may buy or sell investment products as principal or agent and may effect transactions which are not consistent with the information set out in this Website.

You fully understand and agree that, by making available this Website, UBS should not be construed as making: (a) any endorsement of any investment product referred to in this Website; (b) any representation that UBS has performed any due diligence on any investment product referred to in this Website; or (c) any representation that the information in this Website is complete, accurate, clear, fair and not misleading. The use or reliance on any such information contained in this Website is at your own risk and any losses which may be suffered as a result of you entering into any investment are for your account and UBS shall not be liable for any losses arising from or incurred by you in connection therewith. UBS is not responsible or liable for the accuracy and completeness of any such information or the performance or outcome of any investment made by you after receipt of such information, irrespective of whether such information was provided at your request.

Using, copying, redistributing or republishing any part of this Website without prior written permission from UBS is prohibited. Any statements made regarding investment performance objectives, risk and/or return targets shall not constitute a representation or warranty that such objectives or expectations will be achieved or risks are fully disclosed. The information and opinions contained in this Website is based upon information obtained from sources believed to be reliable and in good faith but no responsibility is accepted for any misrepresentation, errors or omissions. All such information and opinions are subject to change without notice. A number of comments in this Website are based on current expectations and are considered “forward-looking statements”. Actual future results may prove to be different from expectations and any unforeseen risk or event may arise in the future. The opinions expressed are a reflection of UBS’s judgment at the time this document is compiled and any obligation to update or alter forward-looking statements as a result of new information, future events, or otherwise is disclaimed.

UBS does not hold out any of its officers and/or employees as having any authority to advise you, and UBS does not purport to advise you on any investment product. Any investment will be made at your sole risk and UBS is not and shall not, in any manner, be liable or responsible for the consequences of any investment.

This Website and its contents are provided on an “as is” and “as available” basis. UBS does not warrant: (a) the accuracy, timeliness, adequacy commercial value or completeness of this Website or its contents, and expressly disclaims any liability for errors, delays or omissions in the contents, or for any action taken in reliance on the contents; (b) that your use of and/or access to this Website or its contents, will be uninterrupted, timely, secure or free from errors or that any identified defect will be corrected; (c) that this Website or any content will meet your requirements or are free from any virus or other malicious, destructive or corrupting code, agent, program or macros; (d) that any information, instructions or communications posted or transmitted by you through this Website is secure and cannot be accessed by unauthorised third parties; and (e) that use of the contents in this Website by you will not infringe the rights of any third parties. No warranty of any kind, implied, express or statutory, including but not limited to the warranties of non-infringement of third party rights, title, merchantability, satisfactory quality or fitness for a particular purpose and freedom from computer virus or other malicious, destructive or corrupting code, agent, program or macros, is given in conjunction with this Website.

You hereby agree to indemnify UBS and any of its officers, employees or agents against, and to keep UBS and any of its officers, employees or agents harmless from, any claims (actual and threatened), settlement sums, liability, loss, damages, costs (including solicitor and client costs and expenses (legal or otherwise)), charges, expenses, actions, proceedings, whether foreseeable or not which we may sustain, suffer or incur, directly or indirectly out of or in the course of or in connection with any the following: (a) any use of this Website or the contents by you, or any part thereof; (b) UBS having made available the Website; (c) any breach of these Terms by you, however arising; or (d) any negligence, act or omission, wilful default, unlawful act, fraud and/or misconduct on your part or violation of any rights of another person or entity by you.

The funds referred to in this Website have been authorised or recognised by the MAS for sale to the public in Singapore (the “Funds”). Copies of the registered Singapore prospectuses ("Prospectuses") referred to in this Website have been lodged with and registered by the MAS. The MAS assumes no responsibility for the contents of the Prospectuses. The registration of the Prospectuses by the MAS does not imply that the SFA or any other legal or regulatory requirements have been complied with.

MAS registration is not a recommendation or endorsement of a Fund nor does it guarantee the commercial merits or performance of such Fund. It does not mean that a Fund is suitable for all investors nor is it an endorsement of its suitability for any particular investor or class of investors. UBS Asset Management (Singapore) Ltd has been appointed as the representative for the Funds in Singapore for the purposes of performing administrative and other related functions relating to the offer of Shares under Section 287 of the Securities and Futures Act, Chapter 289 of Singapore (the "SFA") and such other functions as the MAS may prescribe.

You may not assign your rights under the Terms without our prior written consent. UBS Asset Management (Singapore) Ltd may assign our rights under the Terms to any third party.

No person or entity who is not a party to the Terms shall have any right under the Contracts (Rights of Third Parties) Act, Chapter 53B of Singapore or other similar laws to enforce any term of the Terms regardless of whether such person or entity has been identified by name, as a member of a class or as answering a particular description. For the avoidance of doubt, this shall not affect the rights of any permitted assignee or transferee of the Terms.

These Terms shall be governed by, and shall be construed in accordance with, the laws of Singapore. The courts of Singapore shall have exclusive jurisdiction to hear and determine any suit, action or proceeding, and to settle any disputes, which may arise out of or in connection with these Terms and, for such purposes, you agree to submit  to the jurisdiction of the courts of Singapore. Each party hereby waives any objection which it might at any time have to the courts of Singapore being nominated as the forum to hear and determine any proceedings and to settle any disputes and agrees not to claim that the courts of Singapore are not a convenient or appropriate forum.

© UBS 2020 - the key symbol and UBS are among the registered and unregistered trademarks of UBS. All rights reserved.

Reset