Coffee Break 4/20/2020

INVESTMENT CONVICTIONS

• Core scenario
  • We are watching 5 different triggers: Epidemic-linked indicators including an exit strategy, Market risk, Activity resumption, the Policy response and Valuations. In Europe, confinement measures are still in place but investors are assessing the exit strategy towards the anticipated post-coronavirus period.
  • Currently, economic growth contracts: the measures that minimize the human cost of the outbreak are economically costly.
  • Weak economic data, significant downward earnings revisions and dividend cuts are being integrated in analysts’ forecasts.
  • In the medium term, policy easing from virtually all central banks and upcoming fiscal easing represent a support. The Fed, the ECB and the BoJ keep on easing policies further. It is crucial that fiscal measures are taken, notably in Europe, to support central banks’ moves.
  • From a short term perspective, volatility is here to stay as visibility remains low. From a long term perspective, equity markets are offering value and represent upside potential.

• Market views
  • Since the onset of the Covid-19 crisis, we are looking at the depth (deep), diffusion (global) and the duration (longer than initially thought) to assess the economic pain of the coronavirus. This is challenging to assess as the whole international value chain is impacted.
  • Fiscal and monetary policy responses will outlive the virus. Monetary policy responses aim at ensuring ample liquidity and for some countries, further asset purchases programs.

• Risks
  • In the short term:
    • The coronavirus is a risk until it is contained or a vaccine is found, successfully tested, mass-produced and commercialised.
    • The European political response needs to be improved.
  • In the medium term:
    • Domestic political issues in the US. Joe Biden is likely to be nominated as the Democrats’ candidate for the US presidential election during the convention in August.
    • Trade negotiations between the UK and the EU. The UK made clear that the withdrawal would not be delayed beyond 31 December 2020.

RECENT ACTIONS IN THE ASSET ALLOCATION STRATEGY

We have maintained our slight underweight equity exposure in the light of the most recent information and the sharp market rebound. We examine the lockdown exit strategies in Europe and in the US and consider that the small steps put in place bode for a slow process. We stay attentive to any rebound of the pandemic around the globe. In the fixed income universe, we remain cautious about exposure to government rates in Europe as central bank buying and deterioration in public finances will be huge. We assessed the impact of the last central banks decisions on credit and decided to add to our investment grade exposure. We stay diversified via alternative strategies. We keep our strategic stance on Emerging debt and we continue to hedge via gold and the JPY, among others.

CROSS ASSET STRATEGY

• Given the lack of visibility, our equity exposure is slightly underweight.

  • We are slightly underweight UK and US equities. We do not see a coordinated exit strategy in Europe yet. There is also a lack of visibility on the epidemic outbreak in the US and the UK and the economic impact of containment measures.
  • We are neutral EMU, Emerging market and Japanese equities. Uncertainty surrounding the coronavirus weighs on investors’ sentiment.
  • We keep key convictions in various thematic investments. Oncology and Biotech sectors prove relatively resilient in the current context and reveal high growth potential driven by innovation and pricing power. Climate action themes enable exposure to key solutions for a cleaner future.

  We are underweight bonds, keeping a short duration and diversify out of government bonds. The current environment has the potential to create opportunities on bond markets as well.

  • We expect bond yields to stay low but creep up gradually over the medium-term.
  • We diversify out of low-yielding government bonds. In credit, we add to our investment grade exposure in the US and in Europe and we stay invested in Emerging debt, including EM-issued corporate bonds.
  • We keep an exposure to gold and JPY, which both play the role of safe haven.