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Despite the 14% rally in global equities since the start of November, economists at UBS think that there is further upside to come as vaccines are rolled out and that the rotation trade over the last month into the market’s pandemic laggards has more room to run.

Key quotes

“Based on vaccine production estimates, we expect both a relaxation in restrictions and a recovery in the consumption of services, such as travel and eating out, in the first half of 2021. This should drive a recovery in corporate earnings; we expect 27% EPS growth in the 2021 fiscal year globally.”

“By June 2021, we expect the S&P 500 to trade at 3,900 in our central scenario (6% upside). If further vaccines become available in the early part of 2021, this would increase the chances of achieving our upside scenario, in which we target 4,100 for the S&P 500 (11% upside).”

“Global small-cap performance has become decoupled from its traditional macroeconomic drivers, such as inflation expectations, the yield curve and the US ISM index. As the economy normalizes, we think small caps will benefit both from an improvement in these indicators, and from the re-establishment of historic correlations, which point to further upside potential.”

“We like US mid-caps, which tend to outperform their larger peers in the early stages of an economic recovery and are currently attractively valued. The Russell mid-cap index is trading at a 2% P/E discount to the Russell 1000, compared with a long-term average premium of 6%.”

“Our top pick region remains UK equities. MSCI UK is trading at an 18% discount to global equities on a trailing price-to-earnings ratio, yet offers close to 40% earnings growth in 2021 on our forecasts, driven by the global economic recovery and an anticipated improvement in oil prices. In the event the UK and the European Union are unable to reach a post-Brexit trade deal, we expect a flat to a slightly negative impact on the MSCI UK index at a headline level, as the likely resulting drop in sterling boosts overseas earnings helping offset the hit to domestic sectors.”