The spread of the coronavirus outside of China, oil price collapse and sharp tightening of financial conditions have put the global economy on the brink of recession. Whether or not the hit to the economy ends up meeting a formal definition of a recession, for markets it has felt like one, says UBS Asset Management’s Head of Asset Allocation Evan Brown in the report ‘Macro Quarterly – Navigating the storm’.
Key points:
• The COVID-19 spread, oil price collapse and broader illiquidity in fixed income and particularly credit markets has created a perfect storm for markets and the economy. • As major economies essentially shut down for unknown durations to control the spread of COVID-19, pinpoint economic forecasts are unrealistic. Investors must think in terms of scenario-based outcomes as opposed to normal distributions.
• As part of this, investors should respect the potential for aggressive monetary, liquidity, regulatory and fiscal policy responses which can trigger sharp changes in the market narrative.
• These dynamics create extreme market volatility making market timing very difficult and prudent risk management essential. We prefer relative value to large market directional bets in the near term.
• Longer term investors should not lose sight of the big picture. Overall economic imbalances are much healthier than prior to the Great Financial Crisis of 2008/09.
• Expected returns for risk assets over the intermediate to longer term have increased as risk premiums have widened, reflecting near-term uncertainty.
Asset allocation
«We are overweight equities indices in China and Korea relative to developed economy equity markets. These Asian countries are closer to the end than the beginning of this health crisis and where we are seeing the largest fiscal response. In fixed income, we continue to see value in long US Treasuries relative to German bunds, given more potential for long-term rates to fall in the US than in Europe. In FX the cheap, safe haven JPY continues to provide useful diversification across our portfolios while we seek out differentiated relative value opportunities across the world.»
Here you’ll find the entire report.