Coffee Break 09.11.2020

INVESTMENT CONVICTIONS

• Core scenario
  • In our central scenario we passed the peak in uncertainty while financial markets continue to recover, mainly thanks to abundant liquidity and governments supports, albeit in a choppy range as the US presidential elections dust settles and COVID-19 infections rise.
    • In the US, Joe Biden was elected as the 46^th He will be inaugurated in January. In the meantime, the coronavirus continues to spread and the probability for a strong fiscal stimulus package has diminished, although some support appears possible during the “lame-duck” session.
    • In Europe, ongoing Brexit negotiations and new coronavirus curbing measures may challenge the recovery in activity and international demand.
  • In Europe, the monetary policy response will still be present as the ECB has pre-committed to a December easing, beyond PEPP. Additional fiscal policy measures have been announced as mobility restrictions are tightened. Pay-outs from the EU recovery fund should provide only a small stimulus next year compared to the negative growth shock.
  • Our main convictions remain as follows:
    • Following the US elections, the next strong market catalysts seem just days away: vaccine and Brexit.
    • A vaccine could be approved and trigger a relief rally for which we would adapt the positioning of our portfolios somewhat.
    • 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, the likely take-away of the US elections is less government spending and less tax hikes.
  • Unless COVID-19 infections deteriorate further and trigger more restrictive lockdowns for longer, volatility has likely just peaked but the US presidential elections outcome has yet to be accepted and implemented.
  • Historically, economic recovery (and increasing rates) have been a support for value style performance. This time, 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, ultra-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. The news is imminent: an Emergency Use Authorization (EUA) is possible by year end with a full US Food and Drug Administration approval by the end of Q1 2021.
  • US election outcome. Joe Biden won but most likely faces a divided Congress. A large fiscal stimulus and significant tax hikes seem off the table in a gridlock scenario for the next 2 years.
  • The US-China relations will likely remain on edge although electing Joe Biden might help return to multilateralism.
  • 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.

RECENT ACTIONS IN THE ASSET ALLOCATION STRATEGY

We are overall slightly underweight equities for now but our regional bias starts to reflect the US elections outcome: we sold some EMU equities to invest in the US equity market as we neutralised our EU vs US positioning. We keep our protections on US equities. We also maintain JPY and gold as a portfolio hedge. We are neutral UK equities. Emerging markets have outperformed recently 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.

CROSS ASSET STRATEGY

• Given the US elections´ outcome, we stay slightly underweight equities but increased our exposure to US equities and decreased our exposure to European equities thereby neutralising the regional bias.
  • 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.