Coffee Break 3/16/2020

INVESTMENT CONVICTIONS

• Core scenario
  • We maintain the idea that the coronavirus will turn out to be a temporary shock. Our short-term caution is justified because we do not precisely know the depth, the duration and the diffusion of this shock.
  • The spreading of this virus has a seldom-before-seen impact on volatility and financial markets: equity, bonds and commodities alike. The coronavirus’ impact is challenging to assess as new cases are declared in various countries.
  • The early negative news surrounding the coronavirus has however been incredibly rapidly integrated by financial markets. It is hard to say if most has already been absorbed as we are in unchartered territory and lack historical reference points.
  • Currently, the measures that will minimize the human cost of the outbreak are likely to maximize the economic cost. Hence, in the short term, economic growth will be weak.
  • In the medium term, policy easing from virtually all central banks and upcoming fiscal easing will represent a support. The Fed, the ECB and the BoJ have already eased policies further, they are ready to take additional easing measures as needed and are encouraging fiscal stimulus.

• Market views
  • The depth, diffusion and duration of the coronavirus are challenging to assess as the whole international value chain is impacted.
  • Further monetary measures and initial fiscal measures are being implemented to support the global economy as the coronavirus is spreading. The ECB presented a significant package which has yet to be completed by fiscal measures while the Federal Reserve laid out a renewed Quantitative Easing programme and reduced rates to the zero bound. In addition, single countries are rolling out fiscal stimulus packages.
  • This global shock is temporary, but we don’t know its duration. The next hurdle will be in the publication of Q1 data on a myriad of indicators, including GDP growth and earnings growth.

• Risks
  • In the short term: the coronavirus is a risk until it is contained.
  • In the medium term:
    • Domestic political issues in the US. The electoral campaign is ongoing. The candidate to go against incumbent president Donald Trump on election day has yet to be nominated. It will be between Joe Biden and Bernie Sanders.
    • Trade negotiations between the UK and the EU. The UK left the EU on 31 January 2020 and has just started negotiations to reach a trade deal by the end of this year. PM Boris Johnson threatened to walk away from negotiations if not enough progress is not made by June.

RECENT ACTIONS IN THE ASSET ALLOCATION STRATEGY

We are underweight equities, via put options on European equity markets. We are neutral US, Japanese and Emerging equities. Government bonds spiked as they temporarily benefited from the global risk aversion. Nevertheless, we remain cautious about exposure to government rates in Europe. We stay diversified via alternative strategies. Our stance on Emerging debt has become cautious and opportunistic. We hedge via JPY.

CROSS ASSET STRATEGY

• We are tactically slightly underweight via put options on European markets.
  • We are neutral Emerging market and Japanese equities. Uncertainty surrounding the coronavirus weighs on investors’ sentiment. The macro data collected before the virus spread pointed towards a bottoming out of the economic cycle and budding recovery.
  • We are slightly underweight European equities via our put options. The impact of the coronavirus is likely to weigh on the recovery. The Brexit’s deadline has been met, and the economic relationship with the EU remains unchanged until the end of this year.
  • We are neutral US equities. US equities performed well since our entry points during the summer but valuation is demanding relative to other regions and its historical average.
  • We have key convictions in various thematic investments. Oncology and Biotech sectors reveal high growth potential driven by innovation and pricing power. Climate action themes enables exposure to key solutions for a cleaner future.

• We are underweight bonds, keeping a short duration and diversify out of government bonds.
  • We expect bond yields to stay low but creep up very gradually over the medium-term.
  • 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.