Asset Allocation
UBS offers four hedging strategies in the current environment: asset-class diversification (despite low interest rates, "Treasuries still function as a form of portfolio insurance by helping to protect principal"); geographic diversification; alternative assets (it favors gold and private equity); and dynamic asset allocation based on a quantitative framework that takes emotional considerations out of the equation when determining when to exit and re-enter markets.
Regarding equities, UBS noted the stock market’s stunning descent likely means that many portfolios are underweight to equities regarding their long-term targets. “We generally recommend rebalancing back to target allocations, although in volatile times addressing asset allocation gaps through averaging-in, or combining the sale of put options with the purchase of call options, may help investors reduce timing and overcome the human behaviors that drive underperformance.”
Its recommendations include global quality stocks and companies involved in Asia’s 5G rollout, along with focusing on secular themes that can benefit from the ongoing virus-induced reality such as fintech, e-commerce, online gaming and online education.
Government Backstop
UBS opined that in order to stabilize the markets, governments will need to transfer 1% to 2% of annual GDP to the private sector for every month that sheltering restrictions are in place. That would represent 0.75% GDP per month to pay most of the wages for half of the small-business employees in an economy, with the remainder going to large companies in sectors negatively impacted by the virus such as airlines, railroads, hotels, retail and leisure.
“If properly structured, this would allow most small- and medium-sized enterprises (the most important employers in most economies) to stay afloat, and provide some bailout packages for larger companies. Provided these transfers only occur for the duration of the crisis, and total less than 15–20% of annual GDP, we think this can be achieved,” said Mark Haefele, UBS’s global chief investment officer at its wealth management unit, and one of the authors of the investment strategy guide.
While he noted the large size of the aid packages announced thus far in the U.S., U.K., Germany and France, Haefele said the key to success is finding the proper mix between loan guarantees, deficit spending measures (including payroll tax cuts) and direct support.