Coffee Break 02.11.2020

INVESTMENT CONVICTIONS

• Core scenario
  • Our central scenario forecasts an imminent peak in uncertainty while financial markets continue to recover, mainly thanks to abundant liquidity and governments supports.
    • In the US, due to the elections and the lack of a decision on a new fiscal stimulus package.
    • In Europe, due to Brexit and the rising COVID-19 infections in many countries.
  • The European policy response has given some reassurance by agreeing on the recovery plan for Europe: a combination of the long-term EU budget and Next Generation EU – a total of 1.8 trillion EUR. It ought to result in a decline in euro zone equities’ risk premium. On the monetary side, the ECB signalled further stimulus as soon as December.
  • Our main convictions are as follows:
    • Strong market catalysts seem just days away: US elections, vaccine and Brexit.
    • A vaccine will be approved and trigger a relief rally for which we need to adapt the positioning of our portfolios, i.e. start including small caps, which will benefit from an infrastructure plan, reshoring rhetoric and curve steepening.
    • Simultaneously, our core portfolio remains geared towards the most resilient themes and countries post sanitary crisis while keeping protections on the US equity market.

• Market views
  • From a short-term perspective, earnings season and guidance offer less visibility. Real rates have stopped decreasing awaiting further central bank guidance or more clarity on the political front.
  • Volatility is likely to peak as visibility on the epidemic and its aftermath has deteriorated again and because it is par for the course during presidential elections.
  • Historically, economic recovery (and increasing rates) have been a support for value style performance. Until now, value has not performed as rates have remained low. With slower economic momentum and the Fed’s new monetary policy framework, there is no clear cut argument to favour one style over the other.
  • From a longer-term perspective, accommodative fiscal and monetary policies and the prospect of a vaccine should lead to a recovery of the economy.

• Risks
  • The coronavirus pandemic is the main obstacle to the economic recovery. Only a vaccine could reverse the trend.
  • US election risk. The handling of the coronavirus crisis, economic strains, social unrest and a potential fiscal stimulus cliff are triggering uncertainty at a time when valuation is no longer appealing vs. historical levels.
  • The US-China relations will likely remain on edge and are clouding global growth. Neither country can afford a revival of a trade war.
  • Trade negotiations between the UK and the EU. The UK’s Brexit deadline is fast approaching and the country still lacks a deal with the European Union.

RECENT ACTIONS IN THE ASSET ALLOCATION STRATEGY

We remain overall slightly underweight equities for now, and keep our protections on US equities. We also maintain JPY and gold as a portfolio hedge. Besides our conviction in an overweight EMU vs US equities, we also believe in a weaker USD vs the EUR over time. We are neutral UK equities. Emerging markets have outperformed in October and we keep our growing overweight for now. We remain underweight Japanese equities. We currently keep our bond allocation unchanged and are looking for an entry point to grab some carry, given the COVID and US elections driven uncertainties.

CROSS ASSET STRATEGY

• Our equity exposure is slightly underweight, but with a pronounced selectivity in regional equity allocation and themes.
  • We are overweight euro zone vs. underweight US equities and with a preference for the German equity market. The coordinated response of member states to the virus has strengthened ties. Recovery is uneven between member states though and Germany stands out in terms of governance and performance. US Small and Mid-caps reveal a good entry point for our strategy.
  • We are opportunistically neutral UK equities. The UK has missed out on the global market rebound and a weak GBP should act as a support. It should come as no surprise that Brexit is a headwind for the UK but also for the broad European region.
  • We keep our growing overweight emerging markets equities vs. underweight Japanese equities and have a preference for the Chinese equity market. China stands in a V-shaped economic recovery and is leading the rest of the world by several months.
  • We keep key convictions in various thematic investments. 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.
• We are underweight bonds, keeping a short duration, but highly diversified as the current environment is also creating opportunities in the bond market.
  • We are underweight government bonds which provide no return potential except in risk-off phases. We prefer peripheral bonds vs. core European countries.
  • In a multi-asset portfolio, diversification into credit appears attractive. We are overweight investment grade as central banks’ buying represent a support.
  • While we stay overweight Emerging market debt, we have taken some profit on our exposure in hard currency. Bond markets have largely recovered from crisis levels seen earlier this year.
  • We have an exposure to the NOK, which appeared attractive during the crisis, as well as gold and the JPY, which are risk mitigators.
  • Our deep conviction in the structural reduction of the euro zone risk premium leads us to be short USD vs EUR.