Coffee Break 4/27/2020

INVESTMENT CONVICTIONS

• Core scenario
  • We are watching 5 different triggers: Epidemic-linked indicators, Market risk, Activity resumption, the Policy response and Valuations. Epidemic-linked indicators give some hope: several European countries are discussing plans to ease lockdown measures and the EU has drafted a plan to coordinate.
  • 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 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 mid- to 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: confinement and social distancing measures widely differ from country to country.
  • Fiscal and monetary policy responses will outlive the virus. Monetary policy responses aim at ensuring ample liquidity and for some countries, further asset purchases programmes.

• 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. EU leaders agreed on the need for a European Recovery Fund post “corona”.
  • In the medium term:
    • The US-China conflict will likely remain on edge and is clouding global growth.
    • Domestic political issues in the US. Joe Biden is the only Democrat left running for president as Bernie Sanders dropped out of the race early April.
    • 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 maintain our slight underweight equity exposure. There is an impoved risk/reward ratio for a long-term investor but volatility remains high. Patience is key in this U-shaped recovery. 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. Our assessment of the impact of recent central banks decisions on credit led us to add to our US and European 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.