The ‘Fed story’ will win out over second wave and election fears, UBS says. It’s time for investors to get off the sidelines - MarketWatch skip to content

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The ‘Fed story’ will win out over second wave and election fears, UBS says. It’s time for investors to get off the sidelines

A Chinese member of Blue Sky Rescue wears a protective suit as he fumigates exercise equipment to prevent a second COVID-19 wave in Beijing.

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Investors are once again grappling with a myriad of factors, hopes and fears.

Coronavirus infection rates have risen in a number of countries and states yet investors are also closely tracking the economic recovery, while November’s election looms in the not-too-distant future.

UBS said the Federal Reserve’s “unambiguous” story would win out in the end, driving stocks higher in the medium term and said now wasn’t the time for investors to be sitting on the sidelines. The central bank unveiled plans to start buying a broad and diversified portfolio of corporate bonds last week, sending stocks higher. Other central banks, including the Bank of England and the European Central Bank, have implemented further support in recent days.

The analysts, led by chief investment officer Mark Haefele, said three narratives were currently driving markets; the ‘Fed story’ — ongoing central bank stimulus — the second-wave story, and the U.S. election story. Fears of a second coronavirus wave have come to the fore in recent days, with spikes in Beijing, Germany and a number of U.S. states. The UBS team said that U.S.-China tensions fed into the election narrative, which would come into focus over the next four months.

“Overall we see the second-wave and U.S. election stories as contributing to market volatility as headlines feed investors’ hopes and fears about the speed and strength of the economic recovery. But it is the Fed story that will endure over the medium term,” they said in a note on Monday. They said they were positive on the outlook for both equities and credit, preferring USD high yield, Asian high yield and USD-denominated emerging market sovereign bonds as well as stocks in sectors that have so far lagged behind the market.

“Against this backdrop, we think the most important thing an investor can do is to be invested, rather than sitting on the sidelines. As earnings are likely to recover in the second half of the year and excess liquidity continues to support risk assets, we see further upside potential in global equities, in particular among sectors that have lagged the rally so far,” they added.