UBS AM: Developed markets to recover slower from corona crisis

Economic recovery in developed markets will be slower compared to markets like the Chinese and other North Asian markets. That’s UBS Asset Management’s main message in their report ‹Reopen vs. reactivate: lessons from China’s experience›. Consumers› sense of feeling safe will determine the pace of the recovery, and investors in risk assets in particular will have to price in more uncertainty.

Main viewpoints:

• Investors must focus not just on when economies are set to reopen, but when and how consumers and businesses will feel safe resuming normal activities.
• We examine the experience in China, where discretionary consumption is recovering slowly as individuals change behaviors to reduce risk of infection.
• Developed economies are likely to face more difficulty normalizing than China or other North Asian countries, as there may be less individual acceptance of tracing and surveillance.
•  We suspect the outlook for risk assets will become more challenging from here, as investors must price in greater uncertainty and solvency risks on the recovery path. The S&P 500 is only down about 10% for 2020 which is quite remarkable given the sharp decline in the growth outlook and lofty valuations entering the year.
• We have tremendous respect for the power of coordinated monetary and fiscal policy in providing a bridge through what will be a bumpy road for developed economies. But we would argue that policy support is largely priced in, and that current valuations do not adequately embed the meaningful uncertainty around growth and earnings over coming quarters and years
• For now we favor a moderately defensive equity allocation which should include sectors that are less impacted from lockdowns such as communication services or health care in the current environment.
• As the road to recovery becomes clearer, we would expect the most sold-off sectors (e.g., automobiles, banks, energy) to bottom from an absolute point of view given they trade at deep recession prices and should eventually recover. Therefore, for investors with a longer time horizon and ample risk tolerance we believe that buying into those sectors on dips is likely to pay off.
• Regionally, we prefer North Asian equities and credit given advantages in containing the virus. 

Please find attached the full report ‘Reopen vs. reactivate: lessons from China’s experience’ from  UBS Asset Management.