Coffee Break 10.02.2020

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. The spread of the corona virus might challenge that scenario depending on the timing of the peak of the epidemy and the contagion outside of China.
  • One of 2020’s market drivers will be the US elections on 3 November. Candidates are at increasing end of political spectrums.
  • 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 on multiple fronts mitigating the impact of the corona virus in the short term, the trade war and slowing global growth in the longer term.

• 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. The Chinese authorities are demonstrating their crisis-management skills at a time when, nonetheless, certain(traditional) New Year’s activities will have been irretrievably forfeited.
  • 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.
  • We are temporarily more cautious on equities vs. bonds and have neutralised our positioning.

• 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. The electoral campaign is just getting started.
  • 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

While staying neutral, we somewhat reduced our equity exposure. The uncertainty surrounding the new Coronavirus weighs on global growth and investors’ sentiment is not reflecting it anymore as equity markets stay close to previous top levels. We have neutralised our exposure on all the regions. We stay cautious about exposure to government rates in Europe, the risk reward is not attractive following the drop in yields since the beginning of the year. We diversify out of low-yielding government bonds investing in alternative strategies. Our strategic view on emerging debt remains constructive and we have decided, for now, to 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 tactically reduced our equity exposure to neutral
  • We are neutral Emerging market equities. 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 has been met, and 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. At least, the labour market stays supportive. Japan is directly impacted by fears around global GDP growth.

• 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.
  • Uncertainties around global growth levels this year could nevertheless delay this scenario somewhat.
  • 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 and have an exposure to gold and JPY, which both play the role of safe haven.