The Decade Ahead - UBS House View
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The Decade Ahead
The Decade Ahead
The pandemic advanced many of the key trends we previously identified as defin-
ing our Decade Ahead. Technological disruption, localization, and monetary and
fiscal coordination have accelerated, while political calls for wealth redistribution
and environmental action have grown. Even demographic trends have been
affected as labor market participation has dropped.
Technological disruption Monetary and fiscal coordination
We expect a Year of Discovery to see some- After two years in which bond-buying pro-
what lower usage for some of the technologi- grams have absorbed the majority of net
cal trends most heavily accelerated by the government issuance, central bank bond pur-
pandemic—such as e-commerce, telemedi- chases will be tapered in 2022. That said, the
cine, and video conferencing—as individuals pandemic has demonstrated the capacity of
return to the “real world.” But at the same central banks to facilitate large fiscal spending
time, the long-term factors driving these packages, so we expect quantitative easing
trends remain intact. Amid concern about to remain part of the policy tool kit in the
elevated inflation, it is also important to note years to come, and think monetary and fiscal
that technological disruption is a disinflation- responses to future crises will become increas-
ary force, improving efficiencies and suppress- ingly coordinated. This limits the scope for
ing wage growth. increases in bond yields, presents a threat to
central bank independence, and poses upside
risks for inflation and currency volatility.
Year Ahead 2022 – UBS House ViewThe Decade Ahead
Technological disruption is set Central banks hold an increasing share
to continue of government debt
IoT connections, 2020 – 2026, in billions Share of total US Treasuries held by Federal Reserve and
share of BoJ’s JGB holdings (% of total issued)
30 25 60
25 20 50
20 40
15
15 30
10
10 20
5 5 10
0 0 0
Wide-area IoT Cellular IoT Short-range IoT Total IoT 2008 2010 2012 2014 2016 2018 2020
2020 Share of US Treasuries held by the Fed
2026E Share of BoJ’s JGB holdings (rhs)
Source: Ericsson, UBS, as of February 2021 Source: Bloomberg, UBS, as of November 2021
Political calls for wealth redistribution The road to net-zero carbon risks
have grown sustained higher commodity prices
Federal Reserve Bank of Atlanta wage growth tracker by Bloomberg commodity excess return index
wage level, 12-month moving average of median wage
growth for each category
5.0 110
4.5 100
90
4.0
80
3.5
70
3.0 60
2.5 50
Jan 19 Jul 19 Jan 20 Jul 20 Jan 21 Jul 21 Dec 19 Jun 20 Dec 20 Jun 21
1st quartile 2nd quartile
4 th quartile Overall COVID-19 recession
Source: Federal Reserve Bank of Atlanta, as of October 2021 Source: Bloomberg, UBS, as of November 2021
Deglobalization intact—driven by tech, The pandemic exacerbated
supply chain, security, environmental demographic pressures
concerns US labor force participation rate, in %
World trade as % of GDP
60 68
50 66
40 64
30 62
20 60
1972 1978 1984 1990 1996 2002 2008 2014 2020 1996 2001 2006 2011 2016 2021
Source: World Bank, UBS, as of October 2021 Source: Bloomberg, UBS, as of October 2021
Year Ahead 2022 – UBS House ViewThe Decade Ahead
Wealth redistribution Deglobalization
The entrenchment of the knowledge econ- Global trade bounced strongly in 2021 amid
omy, acceleration of technological trends, and high consumer demand for manufactured
rise in asset prices all contributed to higher goods, but we expect it to grow at a slower
gains for capital over labor during the pan- pace in 2022. Global political dynamics do
demic. But, at the same time, political forces not currently appear to support an increase
in favor of wealth redistribution also acceler- in protectionist measures, yet neither do they
ated. Measures such as a global minimum support a reduction in the barriers imposed
corporate tax, higher US corporate and upper- in the late 2010s. Disputes over climate policy
income tax rates, and China’s “common pros- represent a potential future flashpoint that
perity” drive were all introduced or debated could inspire new barriers to trade. Even with-
over the past year. Over the next decade, we out such barriers, the broader trend of local-
expect fiscal policy to become more redistrib- ization—driven by technologies like automa-
utive. Although redistributive policies tend tion as well as considerations of supply chain
to be an immediate negative for investors, security and environmental impact—remains
they could be positive over time if they boost intact.
aggregate economic growth by increasing the
spending capacity of the average household. Demographics
The pandemic encouraged higher rates of
Environmental action retirement and resignation, exacerbating labor
The economic effects of the net-zero carbon supply challenges and potentially weighing
transition began to manifest in 2021 in the on longer-term economic potential if workers
form of significant increases in commodity do not return to the labor force. Meanwhile,
prices and volatility. If mismanaged, the transi- China’s working-age population is now
tion to net-zero carbon risks an extended shrinking, and while some emerging markets
period of higher commodity prices, which have vast pools of young workers, many of
would in turn bring social, political, and eco- these countries also look likely to take longer
nomic challenges. Government action to force to recover from the economic damage caused
consumers and businesses to pay for the cost by the pandemic. Overall, we expect demo-
of pollution and emissions may also drive graphic forces to contribute to lower growth
higher inflation. Given the sheer scale of and inflation, and suppress interest rates.
investment required, we believe the road to
net-zero carbon is one of the most important
investment trends of the next decade, creat-
ing significant investment opportunities in
greentech, clean air, and carbon reduction
solutions.
Year Ahead 2022 – UBS House ViewInvesting in the Decade Ahead
Investing in the
Decade Ahead
A transformational start to the 2020s has raised the probability of a shift in
the longer-term economic regime, though in our base case we expect a return
to something similar to the “lower for longer” dynamics of the 2010s. Higher
stock valuations, tighter credit spreads, and lower interest rates mean investors
need to take on risk to achieve positive expected real returns. In the years
ahead, we expect equities and corporate credit to deliver higher returns than
cash and government bonds, see alternative assets playing an important role in
portfolio diversification, and think non-US equities have higher return potential
than US equities.
Lower for longer, As pandemic-related drivers of economic
growth begin to subside in the second half
stagflation, or the of 2022, we will start to discover whether the
longer-term economic regime has changed.
‘Roaring 20s’? In our base case, we expect a return to
something similar to the “lower for longer”
dynamics that prevailed in the 2010s. But
amid significant disruptions, we will be
monitoring for potential regime change into
“Roaring 20s” or “stagflation” scenarios.
Year Ahead 2022 – UBS House ViewInvesting in the Decade Ahead
Scenarios for the Decade Ahead
Scenario
Bear case Base case Bull case
Stagflation Lower-for-longer ‘Roaring 20s’
Description Growth slows while infla- Low, if modestly higher, Growth and inflation are
tion remains elevated. interest rates; moderate both boosted, supporting
Aggressive central bank growth; and inflation rates higher interest rates
rate hikes risk triggering close to central bank
recession targets
Catalysts Labor markets are tight, Technology remains Disruptive technologies
sustaining inflationary a disinflationary force drive a productivity boom
wage growth
Demand for capital Capital spending soars
Commodity prices stay remains lower than supply as businesses adapt to
high for the long term the demand surge starting
Demographic forces are
in 2021
Emissions pricing means headwinds to rising rates
costs rise and inflation Governments pump up
investment in support
Inflation expectations
of the green transition
become unanchored,
creating a positive feed- Wage growth among
back loop for inflation lower-income workers
boosts consumer spending
Investment Higher bond yields and Low bond yields and high Higher bond yields
consequences lower equity valuations equity valuations
Falling equity valuations
Weak returns on most Low returns for bonds and but potentially compen-
financial assets, particularly moderate returns for risky sated for by higher
after accounting for infla- assets earnings growth
tion
Growth stocks in favor Good prospective returns
Real assets in favor versus v ersus value stocks
Value stocks in favor versus
nominal assets
growth stocks
Source: UBS
Year Ahead 2022 – UBS House ViewInvesting in the Decade Ahead
Asset class views
Cash and bonds Equities
Government bond yields moved higher in Strong earnings growth and low interest rates
2021, and we expect interest rates to rise have supported developed market equity
modestly in the coming years. However, in our returns in recent years, but slower economic
base case we still expect returns on cash and growth, wealth redistribution policies, and
government bonds to be negative after climate policies could present challenges for
accounting for inflation. The effects of tech- earnings in the years ahead. Nonetheless,
nology, demographics, and monetary-fiscal equities remain one of the few asset classes in
coordination are likely to suppress yields and which we expect meaningful real returns over
rates. Investors looking to protect purchasing the coming decade, and we see valuations
power should consider diversifying into credit remaining supported by relatively low interest
and alternative assets. rates.
Credit Regionally, valuations suggest that the out
Positive, if muted, longer-term growth should performance of US equities over global peers
limit credit default risks in the US and Europe, is unlikely to continue in the next decade.
and we think corporate credit spreads are Emerging market equity valuations are rela-
wide enough to provide a long-term return tively cheap. We believe a globally diversified
pickup over government bonds, although equity allocation will be a key contributor to
historically tight spreads limit the scope for both portfolio growth and income in the years
excess returns and heighten interest rate risks. ahead.
The exception are Asian bonds, where spreads
are currently very high due to uncertainties Alternatives
in the Chinese property market, and where Correlations between equities and bonds rose
we see high return potential alongside high in 2021, as hopes and fears about inflation
volatility. We expect a diversified allocation and monetary policy had similar effects on
to corporate bonds to provide higher returns both asset classes. With monetary and fiscal
than cash or government bonds over the policy considerations likely to remain impor-
long term. tant drivers of the market in the decade
ahead, we think hedge funds will play a vital
role in improving diversification, beyond what
is possible with simple equity-bond portfolios.
Private markets, meanwhile, can provide
investors with access to companies and strate-
gies that are unavailable in public markets,
offering exposure to active management and
in some cases an illiquidity premium.
Year Ahead 2022 – UBS House ViewInvesting in the Decade Ahead
Currencies Real estate
The Japanese yen and the British pound look We think core real estate’s ability to provide
undervalued in terms of purchasing power rental income is attractive in a low-yield world,
parity, so we expect them to appreciate over and it is one of the few asset classes we
the long term, even if we expect some weak- expect to deliver positive real returns in the
ness for the yen in 2022, as investors seek years ahead, even if valuations mean absolute
higher-yielding currencies. We believe inter- returns are likely to be lower than in the
national investors holding Japanese and recent past. Real estate is also a good poten-
UK equities should not currency-hedge their tial hedge against the risk of stagflation. Given
holdings in order to benefit from longer-term significant structural changes in the aftermath
yen and pound appreciation. of the pandemic, selection and active man-
agement of real estate portfolios is key.
Commodities
We think economic development, urbaniza-
tion, population growth, and the process
of electrification will underpin demand for
commodities in the years ahead. Meanwhile,
supply, already constrained by years of under-
investment, could remain limited by climate-
related policies. More extreme weather condi-
tions could also lead to both supply and
demand volatility. Diversification and active
management of commodity investments
remains important, as the divergent perfor-
mance of individual commodities has shown
this year.
Year Ahead 2022 – UBS House ViewInvesting in the Decade Ahead
UBS Wealth Way
How should I construct my ideal asset allocation?
One primary goal of an asset allocation is to window—generally three to five years—is key
maximize the value of your retirement assets, to structuring a plan for your financial success.
and ensure that you have enough wealth to
sustain your desired lifetime spending. With During your working years, your paychecks
this in mind, a key question is: “How much fund your spending, so you can outwait a
risk should we take?” The answer—which bear market. As you near retirement, there is
depends on your time horizon, psychological a risk that you could be forced to lock in
comfort with volatility, and spending needs— otherwise temporary bear market losses, as
can be guided by using the UBS Wealth Way you tap into your wealth for spending. We
framework. therefore recommend building a Liquidity
strategy with enough cash, bonds, and bor-
Higher risk portfolios generally lead to higher rowing capacity to cover three to five years of
returns and more growth over multiyear peri- your cash flow needs. The Liquidity strategy
ods, but there is a clear trade-off between can fund short-term spending needs during
long-term growth potential and short-term market drawdowns, and allow you to confi-
portfolio volatility. As we mention on p. 30, dently remain invested in your Longevity strat-
balanced portfolios historically have recovered egy—the funds needed for the rest of your
far more quickly from bear market losses than retirement spending—for growth and income
all-equity portfolios. This “time under water” to support your lifestyle.
UBS Wealth Way is an approach incorporating Liquidity. Longevity. Legacy. strategies that UBS Switzerland AG,
UBS AG and UBS Financial Services Inc. and our advisors can use to assist clients in exploring and pursuing their
wealth management needs and goals over different timeframes. This approach is not a promise or guarantee that
wealth, or any financial results, can or will be achieved. All investments involve the risk of loss, including the risk
of loss of the entire investment. Timeframes may vary. Strategies are subject to individual client goals, objectives
and suitability.
Year Ahead 2022 – UBS House ViewYear Ahead 2022
Impressum
Year Ahead 2022 – UBS House View Cover photo
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This report reflects the insights and perspec- Traditional), Japanese
tive from the entire CIO team across the
globe and demonstrates the intellectual Contact
leadership of UBS. ubs.com/cio
Global Chief Investment Officer SAP-Nr. 82251E-2101
Mark Haefele
Editor in Chief
Kiran Ganesh
Supervisory analyst
Mark Boehme
Project manager
Sagar Khandelwal
Editorial deadline
13 November 2021
Publishing date
18 November 2021
Design
CIO Content Design
UBS Switzerland AG
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