Coffee Break 12/14/2020

INVESTMENT CONVICTIONS

• Core scenario
  • In our central scenario, and assuming that 1) the vaccine rollout proceeds smoothly, 2) the vaccine has little side effect and 3) the virus does not mutate. Western economies are well on their way to a mechanical rebound of growth followed by a transition supported by Central banks and governments towards a sustainable recovery. H1 2021 will see a strong growth in corporate profit.
  • In the US, President-elect Joe Biden and his transition team are preparing for an early push to pass an ambitious stimulus bill. Time is of the essence as the coronavirus continues to spread, especially in the US. The transition team is also planning executive actions aimed at delivering on campaign promises and undoing the Trump administration's efforts to undermine key government agencies.
  • In Europe, the monetary policy response will still be present beyond PEPP. Additional fiscal policy measures have been announced as mobility restrictions are tightened. Pay-outs from the EU recovery fund should however provide only a small stimulus next year compared to the negative growth shock registered in 2020.
  • Our main convictions remain as follows:
    • The economy is driven by the virus. Markets are driven by the vaccine.
    • The next market catalyst seem just days away: Brexit.
    • As we move towards better visibility, we have an exposure to recovery-related assets: US small caps relative to the US market, UK mid-caps and GBP and convertible bonds.
    • Simultaneously, our core portfolio remains geared towards the most resilient themes and countries post sanitary crisis while keeping protections on the European equity market.

• Market views
  • Volatility has likely peaked end-October…unless COVID-19 infections deteriorate and trigger more restrictive lockdowns for longer.
  • The progress toward a COVID-19 vaccine prompted investors to rotate from the “stay-at-home” stocks to companies that benefit from the economic recovery, i.e. cyclical and value sectors. The rotation will continue into H1 2021.
  • From a longer-term perspective, ultra-accommodative fiscal and monetary policies and the vaccine becoming a reality should support the transition from a mechanical rebound to a sustainable recovery of the economy.

• Risks
  • In the short term
    • Trade negotiations between the UK and the EU. The UK’s Brexit deadline is fast approaching and the country still lacks a definitive deal with the European Union.
    • The coronavirus pandemic is the main obstacle to the economic recovery this winter. But the first vaccines were administered in the UK starting with the most vulnerable population and health care professionals. The US should follow.
    • US State election outcome. Joe Biden won but may face a divided Congress. The control of the Senate is in the hands of the State of Georgia and the January 5^th Republicans have at least 50 seats in the 100-member upper chamber of Congress, while Democrats currently have 48. If Democrats are able to pick up the two remaining Senate seats in Georgia, that will leave the chamber split, with Kamala Harris, the vice-president-elect, able to cast a tiebreaking vote.
  • In the long term
    • Political uncertainty: The social divide is widening between losers and winners of the health crisis.

RECENT ACTIONS IN THE ASSET ALLOCATION STRATEGY

Confident that we are moving into a recovery year with a catch up in growth and a rebound in corporate earnings, we are overweight equities. There is a positive assessment for European and Emerging equities, value sectors, such as banks, and US and UK small and mid-caps. There is also a positive assessment for the longer-term winners of the sanitary crisis: Technology, Health care, and EU Green Deal beneficiaries, among others. Riskier bonds, such as convertible bonds, and high-carry bonds, such as emerging debt, enhance the strategy. This will require continuous active management and agility. We hold a protective derivative strategy on European equities.

CROSS ASSET STRATEGY

• We are entering a recovery year and anticipate a strong first semester, we prefer equities – less expensive than bonds despite high valuation - over bonds.
  • We are overweight EMU and UK equities. We remain overall neutral Europe ex-EMU. European equities will benefit from the turn in market drivers vs. pandemic.
  • We remain overweight emerging markets equities vs. underweight Japanese equities and have a preference for the Chinese equity market. China emerges stronger as the year comes near its end.
  • We are neutral US equities, with a preference for US small and mid-caps.
  • We keep key convictions in various thematic investments. Global Technology, Oncology and Biotech sectors prove relatively resilient in the current context and reveal high growth potential driven by innovation and pricing power.
  • We believe that climate and environmental themes enable exposure to key solutions for a cleaner future and will continue to gain in importance as infrastructure plans are becoming green, from China to Europe, and also the US under a Biden administration.
• We are underweight bonds, keeping a short duration, but highly diversified as the current environment is also creating opportunities in the bond market, including in convertible bonds.
  • We are underweight core government bonds. We are overweight peripheral government bonds.
  • In a multi-asset portfolio, we are overweight emerging debt as it currently brings one of the highest carry. We are neutral US and European investment grade.
  • We hold GBP, likely to re-rate with a soft Brexit. We hold NOK, which appeared attractive during the crisis, as well as gold and the JPY, which are risk mitigators. We are short USD.