Coffee Break 11/16/2020

INVESTMENT CONVICTIONS

• Core scenario
  • In our central scenario, we passed the peak in uncertainty. Financial markets are integrating the improving news flow on the vaccine and US elections in waves. Fiscal and monetary support will remain present. The transition towards the president elect Joe Biden might not be smooth and COVID-19 infections are on the rise in some regions.
    • In the US, the presidential transition continues its rocky course as President Trump refuses to concede the election. 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 in the short term.
  • 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 however provide only a small stimulus next year compared to the negative growth shock registered in 2020.
  • Our main convictions remain as follows:
    • Following the US elections, the next market catalyst seem just weeks away: Brexit.
    • Financial markets rallied as Pfizer/BioNTech announced their vaccine candidate had outperformed expectations in the crucial phase 3 trials, with a 90% efficiency.
    • As we move towards better visibility regarding the recovery in 2021, we added risk-on assets linked to it: US small caps relative to the US market, UK mid-caps and GBP and convertible bonds.
    • 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 materially 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. Last week, the progress toward a COVID-19 vaccine prompted investors to rotate from the “stay-at-home” stocks to companies that will benefit from the economic recovery.
  • From a longer-term perspective, ultra-accommodative fiscal and monetary policies and the vaccine becoming a reality should lead to a recovery of the economy.

• Risks
  • The coronavirus pandemic is the main obstacle to the economic recovery this winter. Only a vaccine could reverse the trend. The 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 a 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. Boris Johnson cannot afford to stay on the current collision course with the EU and with the US.

RECENT ACTIONS IN THE ASSET ALLOCATION STRATEGY

Our convictions have evolved as we recently passed major uncertainties hurdles: The US elections and the announcement of an efficient vaccine to come. The investment horizon has opened up somewhat and our strategy has thereby evolved towards a more risk-on approach. It translates into a slight overweight equities with specific regions and sectors, but also riskier bonds. There is a positive assessment for European and Emerging equities, value sectors, such as banks in both Europe and the US, and US and UK small caps. European and US Investment Grade bonds, and riskier bonds, such as emerging debt and convertible bonds enhance the strategy. We keep protections on US equities.

CROSS ASSET STRATEGY

• The two major uncertainties of 2020 – US elections and COVID-19 – are currently being lifted and visibility is starting to improve. As a result, we are now slightly overweight equities and increased our exposure to US small caps vs the US equity market, to the UK mid-caps and convertible bonds.
  • We are overweight EMU and UK equities and remain overall neutral Europe ex-EMU. The likelihood of a Free Trade Agreement with the European Union has increased with the election of Joe Biden in the US and the departure of Dominic Cummings from Number 10.
  • We keep our 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, from China to Europe, and probably also the US under a Biden administration.
• We are underweight bonds, keeping a short duration, but highly diversified as the current environment is also creating opportunities in the bond market. We recently added exposure to convertible bonds.
  • 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 added exposure to the GBP and exposure to the NOK, which appeared attractive during the crisis, as well as gold and the JPY, which are risk mitigators.
  • Our conviction in the structural reduction of the euro zone risk premium leads us to be short USD vs EUR.