Investors Should Position For Eventual Equity Rally - UBS

Tom Burroughes

23 March 2020

Investors should consider increasing equity weightings to rebalance portfolios after heavy market falls, comes.”

There may also be some sense in buying sectors that have been oversold in the recent market decline, such as Chinese property and automobile manufacturers, Turner continued.

Optimistic, base case and pessimistic
UBS has three scenarios for how the virus outbreak and measures to mitigate it will play out. At the optimistic side, there may be high compliance with “social distancing” measures, a constraining influence as the weather hots up, rapid pharmaceutical measures and other treatments. In this outturn, the peak in cases would happen in early April, and certain measures might be relaxed by early May. In that case, the stock market should be higher from where it is now by the end of the year. In what UBS calls its “base case”, there is a “U-shaped” rather than “V-shaped” recovery, a peak in new cases of the virus around mid-April and eventually relaxation of most severe controls by the end of May. In that case, helped by monetary and fiscal policy, stock markets should be around 10 per cent higher from today.

In the worst-case scenario, there is an “L-shaped” economic picture, with a peak in new cases some way off, protracted economic and social controls, and no recovery in the markets.

Cold shoulder to China?
Asked by this news service if the coronavirus situation will significantly hit Chinese economic and trade links to the West, Turner said that some reversal of East-West global links had already started with the US/China tariffs and other shifts, as seen by some “re-shoring” of manufacturing business to the West. The virus issue may accelerate this process somewhat, he said.

Modern technology is also making it easier and cheaper to manufacture certain items, so China’s old edge as a source of cheap labour has been fading for a while, he continued.

One result of the virus is that the old “just-in-time” inventory approach adopted by manufacturers in recent decades may reverse slightly and firms may move towards more stocks to tide them over during a shock, Turner said.

Among other issues, Turner said that UBS has hiked exposures to emerging market and corporate debt, as these are sectors already under stress and their yield spreads look attractive and likely to compress as and when the global economic environment improves.

Asked if there could be rising inflation if supply-constrained countries cope with a flood of central bank new money, Turner said much depends on how severe the supply shock from the virus proves to be, and how fast it can be unwound.