Stagflation, reflation, soft landing, or slump? – UBS


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Using scenarios to navigate an uncertain environment....


Equities and bonds fall again.

S&P 500: 3,300

US 10-year yield: 4%

Probability: 20%

Fears that the Fed remains “behind the curve” on inflation continue to dominate markets, and bond yields rise. Higher bond yields make equities less attractive, and stocks fall.

How to invest

  • Manage a Liquidity strategy. We recommend sizing a Liquidity¹ portfolio to meet around 3–5 years of cash flow needs, consisting of a combination of cash, bonds, and structured investments.
  • Diversify with hedge funds. In times of high equity-bond market correlations, hedge funds can help to diversify portfolios. Some hedge fund strategies—especially macro strategies—are designed to perform well in recessionary scenarios.


Equities fall but bonds rise.

S&P500: 3,300

US 10-year yield: 1.5%

Probability: 30%

A significant drop in economic demand means growth and inflation fall sharply and investors start to expect a significant drop in corporate profits, hurting equity markets. The Fed considers interest rate cuts, supporting bonds.

How to invest

  • Add defensives and quality. Investors can improve the resilience of equity portfolios by investing in quality income, and defensive sectors like healthcare. We also recommend closing the gap in fixed income allocations with resilient credit.
  • Make use of volatility. Capital-protected strategies may allow investors to use volatility to work in their favor and mitigate potential downside risks in case of a downturn in equity markets. High volatility also presents opportunities to generate yield in FX, commodity, and equity markets.

Soft landing

Modest equity recovery

S&P500; 3,900

US 10-year yield: 3.25%

Probability: 40%

Inflation stays elevated, but investors gain confidence that it is falling under control, and bond yields do not move higher. Corporate profit expectations project neither significant growth nor decline. Stocks rally modestly.

How to invest

  • Invest in value. Value stocks tend to outperform while inflation is above 3%. Evidence that corporate earnings can remain resilient would be particularly supportive of energy and financials. We also like broad value with a quality tilt and the UK.
  • Position for the era of security. As the war in Ukraine continues, governments and businesses alike are adapting to the new era of security—in terms of energy, cyber, and food. Over the longer term, we think this will spur demand for carbon-zero, cybersecurity, and agricultural yield solutions.


Strong equity rally

S&P500: 4,500

US 10-year yield: 3%

Probability: 10%

Inflation surprises to the downside, and a combination of a cease-fire in Ukraine, an end to zero-COVID policies in China, and higher labor force participation drive much investor risk appetite. Stocks rally sharply.

How to invest

  • Be selective in longer-term growth. An alleviation of market concerns about inflation could trigger a rally in growth stocks. We see particular opportunity for the long term in growth stocks trading below long-term average valuations, in automation and robotics, and in China.
  • Invest in private markets. Investing in private equity following public market declines has historically been associated with strong returns. The average annual return on global growth buyout funds launched a year after a peak in the cenarios summary sheet.

Content is a product of the Chief Investment Office (CIO).

  • MSCI All Country World Index has been 18.6%, according to Cambridge Associates’ data since 1995.

For much more, see the Global Financial Markets report 2H outlook: Stagflation, reflation, soft landing, or slump?, 23 June, 2022.

Also see the s

¹ Timeframes may vary. Strategies are subject to individual client goals, objectives and suitability. This approach is not a promise or guarantee that wealth, or any financial results, can or will be achieved.

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