Coffee Break 12/21/2020

INVESTMENT CONVICTIONS

• Core scenario
  • In our central scenario we are 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’s Cabinet picks are beginning to work through the confirmation process in the Republican-controlled Senate as transition officials and Democrats press to avoid delays in putting key people in place amid the pandemic.
  • In Europe, our central scenario assumes the end of social distancing and a swift implementation of the Next Generation EU plan.
  • 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.
    • We have an exposure to recovery-related assets: US small caps relative to the US market, UK mid-caps and GBP and European and US banks.
    • 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
  • Covid-19-related volatility has likely peaked end-October.
  • 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 is likely to 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 and US starting with the most vulnerable population and health care professionals. Continental European residents are next.
    • US State election outcome. Joe Biden won the presidency but may face a divided Congress. The control of the Senate is in the hands of the State of Georgia and the runoffs on January 5. 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 accompanied by a catch up in growth and a rebound in corporate earnings, we are overweight equities but with a protective derivative strategy on European equities as a setback cannot be excluded at the current juncture. As equity markets are rising, they also become vulnerable to the unexpected. We keep 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.

CROSS ASSET STRATEGY

• We are entering a recovery year and anticipate a strong first half, we prefer equities – less expensive than bonds despite high valuation.
  • 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 and have a preference for the Chinese equity market. China emerges stronger as we enter 2021.
  • We are neutral US equities, with a preference for US banks and small and mid-caps.
  • We are also neutral Japanese equities.
  • 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 and overweight European peripheral government bonds.
  • In a multi-asset portfolio, we focus on the source of the highest carry, i.e. emerging debt. We are neutral US and European investment grade credit.
  • We hold GBP, having reached some of its lowest levels since the Brexit referendum. We hold NOK, which appeared attractive during the crisis, as well as gold and the JPY, which are risk mitigators. We remain cautious on the US dollar.