EC Bridging The Gap To A Broader Recovery

Highlights

  • Vaccine development and the ongoing fiscal response (which the upcoming US election may heavily impact) are the critical themes that will shape the timing and strength of the economic normalization process.
  • We expect emergency approval of 1-3 vaccines in Q4 2020 and broad availability in mid-2021.
  • The outlook for US and global growth remains positive even in the absence of additional fiscal support.
  • We favor cyclical, value, and emerging market exposures on increased confidence in the durability and broadening of the early-cycle environment.
  • Investors should focus on the totality of policy changes in assessing US election outcomes, not merely the tax implications.

An ongoing struggle between virus-induced impairments to economic activity and the powerful policy response continues to dominate the economic backdrop. The coming months should start to answer the lingering questions on these defining features of 2020. While cognizant of the downside risks, we expect the outcomes will help bridge the gap to a broadening recovery.

There is good news and bad news on the relationship between infection levels and high-frequency, economically-sensitive mobility data in the US and Europe. On the plus side, rising case counts after the initial peak failed to cause a pronounced rollover in activity, as better public health behaviors allowed for a cautious reopening process to continue. This provides confidence that additional waves of the virus may not necessarily elicit a return to economic contraction. On the other hand, the persistent threat to public health still results in a substantial shortfall in mobility relative to the pre-pandemic baseline. A durable return to pre-COVID-19 levels and patterns of economic activity is contingent upon the development and distribution of an effective, trusted vaccine.

We see the principal sources of two-sided uncertainty in the economic outlook as the timeline for a vaccine and changes in the fiscal impulse that can expedite this recovery or put it in jeopardy.

The surprisingly strong global growth recovery is shifting into a lower gear, in line with our expectations. But even with moderating economic momentum, our view of the medium-term picture for financial markets remains constructive. Risk assets are looking ahead to a continuation of growth going forward, thanks in part to optimism on vaccine development. Earnings are poised to rise while the discount rate remains subdued, a function of the Federal Reserve’s structurally more dovish flexible inflation targeting framework. This approach is designed to amplify existing monetary accommodation as the expansion strengthens, which should cap real yields and weigh on the US dollar. A robust pace of growth in China’s credit impulse and the striking rally in the CRB Raw Industrial Metals index are leading indicators of a solid foundation for real activity, particularly in the goods sector and EM. And in Europe, many nations have extended furlough subsidy programs, a useful backstop for incomes and spending. The EU Recovery Fund ensures that some degree of fiscal support will persist next year.

Following the recent correction, we are looking to tactically add risk and favor more economically sensitive sectors and regions. The ongoing early-cycle environment remains fertile ground for a mix of cyclical positions that are already trending positively or have asymmetric catch-up potential as the global economy heals. We see a suite of attractive relative value opportunities across asset classes, with a preference for trades consistent with a broadening of risk appetite on enhanced investor conviction in the process of durable economic normalization. We believe that vaccine progress and the fiscal thrust will drive the timing, magnitude, and longevity of the success in the early-cycle opportunity set.

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Disclaimer: Views and opinions expressed are presented for informational purposes only and are a reflection of UBS Asset Management’s best judgment at the time a report or other content ...

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Moon Kil Woong 1 month ago Contributor's comment

I don't think we should expect or count on a vaccine. The odds are slim one will work effectively enough to grant social immunity. Even if it did, getting people to pay for it and take it will take months, if not years given it is being politicized and we don't have a national health care system. Global growth for the US will largely be dependent of the election amazingly, with Trump being a barrier to globalism. Tech will still dominate along with biotech. However, the extremes will be toned down with Facebook, Tesla, etc. not growing as rapidly as financial strength over growth starts dominating. I expect a housing/property collapse before a major market meltdown.