Coffee Break 3/1/2021

LAST WEEK IN A NUTSHELL

  • The combination of a sharp drop in Coronavirus infections worldwide and the prospect of a significant stimulus package led to an accelerated rise in US yields.
  • Fed chair Jerome Powell emphasised that the economy was still “a long way from the Fed’s goals” and played down inflation risks. Bond markets fear that the Fed’s economic goals are being met too soon.
  • The European Council debated ways to speed up the rollout of vaccines as well as containment measures that should remain in place as the virus´ new variants still weigh on the recovery.
  • At the G20, the US signalled an openness to issuing Special Drawing Rights at the IMF to worse-off countries and called for a truly global vaccination campaign, a U-turn from the previous administration standpoint.

 

WHAT’S NEXT?

  • As we arrive in March, key countries will release their final PMI for February, likely confirming the improving trend overall.
  • The US will release their monthly US job report as the economy is still short of 10 million jobs from the peak in February 2020 while both consumption and business confidence strengthened.
  • The UK government should reveal its latest budget and could announce a rise in corporate tax from the current 19% rate.
  • Q4 2020 earnings season is winding down. A further 15 companies from the S&P 500 will be reporting, as well as 64 from the STOXX 600. So far, a majority reported a positive surprise on both earnings and sales.

INVESTMENT CONVICTIONS

  • Core scenario
    • In our central scenario, we have taken into account the unfortunate virus mutation and the risk of vaccine inefficacy. The current circumstances do not call into question the mechanical rebound of growth followed by a transition supported by central banks and governments towards a sustainable recovery in the Western hemisphere. H1 2021 will see strong growth in corporate profit and financial markets will likely look favourably on the return of buybacks.
    • In the US, Joe Biden and his administration have the advantage of a unified Congress, which will support the next fiscal stimulus plan. US rates are increasing. A point of equilibrium should be found between a renewed interest for US bonds without jeopardising the recovery if the increase is too steep and/or too fast.
    • In Europe, our central scenario assumes a comeback to growth trend by end-2021 and a swift implementation of the Next Generation EU plan. Italy has nipped a political crisis in the bud by selecting Mario Draghi as prime minister. He will have around €200bn in recovery funds to spend on digitalization, reskilling and to speed up plans for the country to transition away from fossil fuels. His arrival could also be a support for more confidence towards the euro zone’s periphery.
  • Market views
    • An economy still driven by the virus and the variants whereas markets are driven by the speed of vaccine rollout as well as strong expectations in improving corporate earnings.
    • Inflows in equities continue from both private and institutional investors in spite of increasing yield.
    • We have exposure to recovery-related assets: Overweight equities vs. bonds, European and US banks, US and UK small and mid-caps and GBP, and exposure to commodities.
    • Simultaneously, our core portfolio remains geared towards the most resilient themes and countries while keeping protections on the European equity market.
  • Risks
    • Virus vs vaccine rollout: The risks associated with the epidemic have not completely disappeared. Some European countries may announce new containment measures and continue to disappoint on the economic recovery in H1. The vaccine rollout appears underwhelming so far and the recent mutation of the virus could lead to increased efforts to reach herd immunity later this year. Besides, inefficacy of some vaccines on new variants could be a catalyst for a market slowdown.
    • Rising bond yields following the US political transition. Prospects of more government debt are pushing investors away from Treasuries, as the curve steepens, with the 10Y yield floating higher. Also, as the larger fiscal spending on infrastructure is being discounted, this is adding momentum to yields.
    • Geopolitical tensions : Tensions between China and the US could be back, with Taiwan crystallizing discord, although the Biden administration is managing diplomatic relations in a more consensual manner.
    • Political uncertainty: The social divide is widening between losers and winners of the health crisis.


RECENT ACTIONS IN THE ASSET ALLOCATION STRATEGY

2021 is a recovery year in terms of economic activity. The coronavirus has mutated and its variants might challenge the efficacy of the vaccines, but global sentiment remains confident in a stronger economy. We are overweight equities and hedge against possible short-term disappointments in the market. In terms of equities, we remain overweight European and to a lesser extent, Emerging Markets equities. We keep a neutral stance on US and Japanese equities. In terms of sectors, we have exposures to value sectors, such as banks, US and UK small and mid-caps to participate in the reflation/re-opening underway. In addition, we are short duration, neutral credit, have an exposure to commodities, and are long GBP, among others. On the other side of our barbell strategy, there is a positive assessment for the long-term winners of the sanitary crisis: Health Care, EU Green Deal beneficiaries, among others and technology. 2021 will require continuous active management and agility.

 

CROSS ASSET STRATEGY

  • 2021 shall be a recovery year and as we anticipate a strong rebound we prefer equities – less expensive than bonds despite high valuations.
    • We are overweight European equities, especially euro zone and UK. European equities will benefit from the turn in market drivers vs. pandemic. The successful vaccine rollout is a game changer for the UK economy as activity should pick up faster than on the continent. In addition, UK equity valuations still remain relatively attractive.
    • We remain overweight emerging markets equities and have a preference for the Chinese equity market. China emerges stronger and is keeping its lead.
    • 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.
    • In addition to GBP, we hold gold and the JPY, which are risk mitigators. We remain cautious on the US dollar.
    • We have an exposure to rising commodity prices, via a basket that also includes currencies, such as the AUD, the CAD and the NOK.



Our positioning