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by UBS
The content in this infographic was relevant when it was published on 18 June 2020.
Current views may differ.

Prior to the Covid-19 recession, the US labour market was already a fragile barbell, with mid-skilled jobs falling as a proportion of overall employment.

Mid-level skill jobs have lost share in the labour market, while low-level jobs have gained
Low-level skill jobs
Middle-level skill jobs
High-level skill jobs
60%
50%
40%
30%
20%
10%
0%
1990
1993
1996
1999
2002
2005
2008
2011
2014
2017
2020
Share of US labour market
Source: Haver, UBS.

The Covid-19 crisis introduced further weaknesses because of its disproportionate impact on service sector jobs due to social distancing. Given the possibility of faster automation plus the global nature of this demand hit, the labour market, and therefore consumer confidence, may not improve very quickly.

If dampened consumer confidence leads to greater saving; corporates will likely move their focus away from raising cash and towards deleveraging.

UBS believes a focus on free cashflow amid higher debt and uncertainty could mean that corporate capital expenditure remains weak, which would have a negative impact on long-term earnings growth expectations.1

Outside the US, central banks’ large quantitative easing programmes have not been able to push real interest rates lower, leaving it up to fiscal policy to buffer against future growth shocks.

But vigorous government spending has been dampened by the fact that it is only partially compensating for a vacuum of spending elsewhere.

Limited policy ammunition risks weak responses to future shocks, which could significantly increase earnings volatility.

Whilst some investors are worried about inflation, UBS believes negative output gaps, weak oil prices, a subdued money multiplier2 and limited policy buffers for the future mean significantly higher disinflationary risks.

Against that backdrop, it should be hard for value stocks to perform strongly for extended periods without a meaningful rise in inflation expectations and commodity prices.3

Sectors in focus
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The lower-for-longer backdrop supports demand for yielding investments such as Real Estate.
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With lower growth and lower interest rates, profitability in the Banking industry is unlikely to return to pre-Covid-19 levels
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Falling discretionary purchases and limited disposable income could hit the General Retail sector
Sources:
1. Haver, UBS
2, 3. MSCI, Datastream, Bloomberg, UBS
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