Will we have a “second wave” — or catch a “second wind”? asks Mark Haefele, chief investment officer of UBS Global Wealth Management, in a monthly outlook.
A second wave wouldn’t just involve a recurrence of COVID-19 cases. It might also include a return of U.S.-China trade tensions — and U.S. equity valuations that are already relatively rich, even after the massive sell-off in March. Markets have been range-bound, waiting for more clarity on what Haefele thinks is the key question: whether virus infections will flare up again.
Still, investors have to plan, and Haefele lays out three possible scenarios along with investment ideas for each.
Upside Scenario: In this outlook, lockdown measures are eased throughout May and June, and do not need to be reimposed later. “In this case, we would expect some of the market segments that have underperformed, including cyclicals and value, to begin to outperform.”
That outperformance won’t be across the board, Haefele stresses. In Europe, he suggests investors look to German and EMU industrials, and in the U.S., to mid-cap stocks, particularly those that benefit from a rebound in household consumption.
While it’s natural to expect the value style to be in favor if the economic cycle gets a second wind, the best way to play that will likely be in U.S. energy stocks and U.K. equities, Haefele says. Since the U.S. dollar would likely depreciate in this scenario, the best currency bet versus the dollar
would likely be the British pound.
Read:Here are the not-too-pricey stocks Goldman recommends as economies emerge from coronavirus shutdowns
Central scenario: in Haefele’s base case, economic activity gets back to normal in May and June, but “economic functioning does not fully normalize until December.”
Such a scenario would favor credit, particularly U.S. investment-grade
and high-yield corporate debt
, USD emerging market sovereign bonds, and green bonds, Haefele said. It would also confirm some of the bank’s longer-term investment theses, such as telemedicine, genetic therapies, automation and robotics.
Downside scenario: In the worst case, investors will be hard-pressed to find safe assets with attractive values, Haefele notes. While investors will likely reach for high-grade bonds
, they “already have such low yields that they are virtually guaranteeing the destruction of purchasing power over the long term,” he wrote. Gold
will likely rally.
While the collapse in consumer demand over the course of the spring makes disinflation more likely than inflation over the short term, with the market pricing in record-low inflation, Treasury Inflation-Protected Securities could outperform if there’s any whiff of inflation or inflation uncertainty. That’s perhaps more possible than investors realize, Haefele noted, “given high levels of public debt and questions about central bank independence.”
Investors may also instead choose to reach for active management, in whatever form it’s available: hedge funds or dynamic asset allocation funds.
See:This ‘multifactor’ ETF saw the March downturn coming. But can it adapt to whatever’s next?