Coffee Break 03.02.2020

INVESTMENT CONVICTIONS

• Core scenario
  • Our 2020 scenario is constructive as we expect a bottoming out of the economy but we also expect lower global expected returns than in 2019.
  • One of 2020’s market drivers will be the US elections on 3 November. We expect global trade uncertainty to transition to a US-focused election uncertainty.
  • Central banks have reached massive accommodation policies. In the US, the Fed is in a new round of asset purchases but not calling it quantitative easing. The accommodative stance is a medium-term tailwind for the global growth/inflation mix and upcoming data should reflect this.
  • In Emerging economies, Chinese authorities are mitigating the impact of the trade war and slowing global growth by using “appropriate” currency, monetary and fiscal tools. China’s central bank cut the banks’ Required Reserved Ratios for the 8th time in 2 years early January 2020. Their next step will be to mitigate the impact of the Coronavirus.

• Market views
  • The assessment of the Coronavirus’s impact is challenging. Unlike in 2003 with SARS, China has now become a major player and represent 20% of the global economy. Chinese authorities are displaying great power in the crisis management. Some of Chinese New Year’s activity can not be made up for.
  • Significant fall in political risks: trade deal Phase One was finally signed. The negotiations on Phase Two shall start immediately but Donald Trump has already hinted he may wait until November. A trade deal between the UK and the EU is the next hurdle in the Brexit saga.
  • There is increasing talk of an ambitious climate roadmap and EU Banking union. Cyclical and value stocks could benefit from better prospects here.
  • The relative equity valuation vs. bonds remains attractive.

• Risks
  • The US-China trade conflict. Relations between US President Trump and China will likely always be on edge.
  • Domestic political issues in the US, e.g. Donald Trump is standing trial for abuse of power and obstruction of Congress. While Democratic primary process has been going on for a year, the voting process will get underway in February to determine who will run against President Trump in the general election.
  • Geopolitical issues (e.g. Iran, Hong Kong) are still part of unresolved current affairs. These could trigger volatility shocks and attractive entry points.

RECENT ACTIONS IN THE ASSET ALLOCATION STRATEGY

We tactically reduced our equity exposure to neutral as the uncertainty surrounding new Coronavirus weighs on global growth and investors’ sentiment. We are now neutral euro zone and Emerging markets equities. We are also neutral US, UK, and Japanese equities. We stay cautious about exposure to government rates in developed countries and recently added protection on rising inflation expectations. We diversify out of low-yielding government bonds and keep an exposure to Emerging markets debt, including EM-issued corporate debt. We also stay invested in JPY and gold, which play their safe haven roles.

CROSS ASSET STRATEGY

• • We are neutral Emerging market equities. After a 10% rise since early-December, uncertainty surrounding new Coronavirus weighs on investors’ sentiment. The latest macro data (collected before the virus spread) point towards a bottoming out of the economic cycle and budding recovery.
  • We are neutral euro zone equities. The latest macro data also show signs of bottoming out in the economy. A window of opportunity on fiscal accommodation is open with longer ECB visibility.
  • We are neutral US equities. US equities did perform well since our entry points during the summer but valuation is demanding relative to other regions and its historical average whereas the country no longer deserves the same safety premium as in 2019.
  • We are neutral UK. The Brexit’s deadline is approaching, although the economic relationship with the EU remains unchanged until the end of this year. The odds in favour of a rate cut by the Bank of England have risen. Valuation and the competitive advantage of a weak currency make the country attractive. Investors’ positioning is improving from low levels.
  • We stay neutral Japanese equities. Absence of conviction, in spite of Prime minister Shinzo Abe’s fiscal stimulus package announcement. The package is meant to mitigate the impact of the VAT hike, which has dampened consumption and confidence. At least, the labour market stays supportive.

• We are underweight bonds, keeping a short duration and diversify out of government bonds.
  • We expect rates and bond yields, to creep up very gradually but stay low.
  • The ECB just launched its first strategic review since 2003. It will assess its formulation of price stability, monetary policy toolkit, economic and monetary analyses and communication practices by year-end.
  • We diversify out of low-yielding government bonds. We recently purchased protection against rising inflation expectations. In credit, our preference goes to Emerging debt, including EM-issued corporate bonds.
  • We diversify as we an exposure to gold and JPY, which both play the role of safe haven.