UBS: The three market scenarios and the top three strategies

Her Eleftherias Kourtali

Markets face significant geopolitical and economic uncertainty, with the war in Ukraine escalating and sparking a growing humanitarian crisis, UBS said in a report today, adding that sanctions have disrupted commodity flows and created commodity flows. instability in some markets. In this context, the Swiss bank identifies three possible scenarios for the markets and proposes the investment strategy that in the current environment will offer profits, whatever the outcome of the crisis.

UBS points out that the markets have a cocktail of uncertainty ahead of them. The Fed raised interest rates for the first time since 2018, partly in response to the impact of higher commodity prices on inflation. China has been facing the largest COVID-19 epidemic since the beginning of the pandemic and has marked a potentially significant shift in economic policy.

Recently, shares have risen. This is partly due to the fact that rising bond yields and inflation have left many market participants believing that “there is no alternative” to stocks. However, further sanctions on Russian oil could lead to an “inevitable” recession, according to the Fed.

Part of the reason markets feel so uncertain today is the diversity and interrelationships of key market players, UBS points out. The war, commodity movements, the Fed’s intentions, China’s inflation and economic policies, and its measures against the pandemic are what have defined the markets in recent weeks.

Given the many macroeconomic factors, UBS sees three possible scenarios for the markets in the near future:

Under the baseline scenario, the war will get worse before it improves, but developments will allow sanctions and oil prices to peak until the summer. The fall in inflation in the second half of the year will allow monetary policy concerns to subside and markets to move higher.

According the positive scenario of UBS, the above positive result occurs earlier. A relatively quick end to the war means that there will be a small further increase in sanctions or oil prices from current levels. Limited impact on growth, inflation and monetary policy, and alleviation of reduced geopolitical uncertainties, will drive markets significantly higher.

On the contrary, in the unfavorable scenario, sanctions continue to escalate and drive oil prices significantly higher. Fears and the eventual implementation of stagnant inflation lead to much stricter monetary policy and financial markets move significantly lower.

In the short term, UBS believes that the most crucial question for the markets, which will determine which of these scenarios will occur, is when we will reach the maximum of sanctions and oil prices. The answer to this is uncertain, as European diplomats are often more optimistic than their American counterparts about the prospects of resolving the war.

While it may seem too simplistic to weaken the Fed’s focus as a key lever for markets, the Swiss bank believes the Fed would adjust its policy on the basis of war and sanctions.

Given the degree of uncertainty, UBS prefers in its investment strategy to take positions in three areas where they have the advantage of greater visibility for the future.

First, the sanctions are likely to remain in place regardless of whether a ceasefire is agreed in the coming weeks. This means that energy-related commodities and stocks remain effective as a portfolio hedge, and are likely to do well even in the unfavorable scenario.

Secondly, energy costs are likely to increase inflation and contribute to higher interest rates. The Fed has already raised interest rates and signaled greater willingness to join more raises. In an environment of rising interest rates, UBS prefers “value” stocks and the banking sector, while seeing positive outlook on investment bonds.

End, Russia’s invasion of Ukraine will usher in a new era of global security, covering the energy, food, data, national defense and climate sectors. UBS expects increased international distrust to push governments and corporations to place greater emphasis on security and stability, favoring relevant sectors of the economy.