Mega-cap tech firms could lag the market next year, but tech in general won't underperform, says UBS chief investment officer

Mark Haefele, Chief Investment Officer at UBS Global Wealth Management, says that stock markets will rise and fall depending on how quickly Covid-19 vaccines are approved and distributed

Sophie Shulman 16:3306.12.20
The traditional end of the year rally began earlier than usual this year, amid a storm, just like all of 2020 was drastically different than expected. November ended with a 13% rise in the stock market, and became the best month in U.S. stock markets since 1987. During the first days of December, the Dow Jones and S&P 500 indexes registered new highs, with the news of a coronavirus (Covid-19) vaccine being on the way fueling the extraordinary optimism that had already characterized much of the year despite the serious economic crisis. The new vaccine by Pfizer has already been approved in the U.K. and the FDA is set to give its verdict this Thursday.


Is the market's performance dependent on whether or not Pfizer's new vaccine will get the FDA’s approval?


“Based on the Phase 3 trial data released so far, the market is awaiting Pfizer’s vaccines, which will be distributed at the beginning of 2021,” Mark Haefele Chief Investment Officer of UBS Global Wealth Management and the Chair of UBS Global Investment Committee who manages $2 trillion, said in an interview with Calcalist. “The main question is how quickly the approval process will be, and how quickly the vaccines will be widely distributed. Returning to a normal economic routine mainly depends on these questions. If all the leading trial vaccines prove ineffective, this would be a major setback for markets. However, based on the trial results so far, that is looking very unlikely.”


Mark Haefele of UBS Global Wealth Management. Photo: Bloomberg Mark Haefele of UBS Global Wealth Management. Photo: Bloomberg


The markets’ worst-case scenario came true


Before the U.S. presidential elections, the worst-case scenario was if President Donald Trump would refuse to accept the outcome of the election. Although it came true, the markets went on to rally.


Despite the victory of president-elect Joe Biden, it seems as if the U.S. Congress will have a Republican majority, and it will be difficult for Biden to pass legislation. Will Trump’s refusal to accept the outcome of the elections have a negative influence on stock markets?


“Although it seems as though Congress will have a Republican majority, historically this doesn’t mean that this will hold back positive trends in the markets. Since 1982, the annual average output of the S&P 500 has been 12% in either type of government, meaning that there wasn’t any difference in market performance whether the White House and the Congress were united or split.”


So are there any preferred sectors for investments ahead of Biden’s entry into the White House?


“A Biden Administration could create momentum for a green agenda, and that could be a sector that investors need to pay attention to. Although it’s not likely that Biden will gain approval for his $2 trillion green energy plan with a Republican majority in Congress, the swift appointment of former-Secretary of State John Kerry as the International Envoy for Climate Change shows that this will be an important topic in the White House. We are expecting the new administration to use presidential orders and other regulatory tools to promote sustainable development.”


Over the past couple of years we heard a lot about ESG (Environmental, Social, and Corporate Governance) and sustainable investing - how did it perform during 2020 and what is your outlook for the next year? Did the pandemic make investors more aware to ESG issues?


“It certainly did. During the pandemic we have seen the performance of sustainable assets continue to match conventional asset classes, and in some cases outperform. We expect this to continue. A number of governments around the world have shown a commitment to a green recovery, especially in Europe. Globally, we expect government regulation, recovery spending, and investment aimed at lowering emissions to improve the outlook for greentech firms, ranging from battery electric vehicles to renewable energy.”


Does this forecast relate to stocks only or also to bonds?


“Those who invest in bonds, typically tend to hold onto them for a while, and that’s why sustainable bonds are critical. Green bonds have shown more defensive characteristics and credit ratings were higher on average in comparison to an investment bond-related index. At the same time, bonds that were given by merchant banks (MBD) for developing countries and improving and supporting social and physical infrastructure have resulted in higher yields of some 15 points in comparison to regular U.S. government bonds.”


Last September, UBS announced that sustainable investments were the preferable solution for their private banking customers. Now, UBS manages half a trillion dollars in such assets.


Isn’t that a risky decision? Can you say that sustainable investments are safe for everyone?


“While traditional investments can still fit everyone, UBS believes that a sustainable investment portfolio can provide similar or higher returns than traditional investment portfolios, and allows for a more varied investment portfolio.”


Crises are known as a catalyst of change, and it could be that adopting these sustainable developments could be one of them. Can you list the main changes to the world economy? In rerospect, could we say that this or that happened because of the pandemic?


“This would be a long list. The full impact of the pandemic will take years to unfold. But already we can see that the pandemic gave an additional impetus to digitization – including in accelerating the use of e-commerce and kicking off the use of telemedicine and other stay-at-home technologies. We are also seeing a surge in government debt, which will have lasting implications.”


We saw all over the world small and medium businesses suffer more than the large chains throughout the crisis, what are the implications of that on investment in large cap vs. small and medium cap companies?


“As the recovery broadens, we see cyclically-sensitive parts of the market doing better. This will include small and medium-sized businesses in the U.S. and Europe. It is actually the mega-cap tech firms that could end up lagging the market But we don't see technology as a whole underperforming – depending on how you define it. If the last decade was about investing in the technology sector itself, we think the next decade will reward investing in the disruptors in sectors undergoing technological transformation. We see the greatest growth potential for companies exposed to the 5G rollout, fintech, greentech, and healthtech. The main developments in 2021 will be a change in the identity of who is leading the market. In 2020, big tech stocks rose 47% compared to 4% for the rest of the market. During the next stage, we predict that the rally will broaden to additional sectors.”