Coffee Break 07.12.2020

INVESTMENT CONVICTIONS

• Core scenario
  • In our central scenario, the US election results and the announcement of an efficient vaccine triggered a relief rally on financial markets and a rotation towards value sectors. The improving news flow is being integrated in waves and markets will oscillate with consolidation phases too. Fiscal and monetary support will remain present.
    • In the US, President-elect Joe Biden and his transition team are preparing for an early push to pass an ambitious stimulus bill. They are also planning executive actions aimed at delivering on campaign promises and undoing the Trump administration's efforts to undermine key government agencies.
    • The coronavirus continues to spread, especially in the US.
    • 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:
    • The economy is driven by the virus. Markets are driven by the vaccine.
    • The next market catalyst seem just weeks away: Brexit.
    • As we move towards better visibility, we have an exposure to recovery-related assets: 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 than under a Blue sweep and less tax hikes.
  • Unless COVID-19 infections deteriorate and trigger more restrictive lockdowns for longer, volatility has likely peaked end-October.
  • Historically, economic recovery (and rising bond yields) have been a support for value style performance. The progress toward a COVID-19 vaccine prompted investors to rotate from the “stay-at-home” stocks to companies that benefit from the economic recovery, i.e. cyclical and value sectors.
  • 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. Pfizer has already asked the Food and Drug Administration to authorize its vaccine for emergency use, and the agency could have an answer as soon as December 10^th.
  • US State election outcome. Joe Biden won but may face a divided Congress. The control of the Senate is in the hands of the State of Georgia and the January 5^th Republicans have at least 50 seats in the 100-member upper chamber of Congress, while Democrats currently have 48. If Democrats are able to pick up the two remaining Senate seats in Georgia, that will leave the chamber split, with Kamala Harris, the vice-president-elect, able to cast a tiebreaking vote.
  • 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.
  • Political uncertainty: The social divide is widening between losers and winners of the health crisis.

RECENT ACTIONS IN THE ASSET ALLOCATION STRATEGY

We are slightly overweight equities, confident that medium-term perspectives have improved. There is a positive assessment for European and Emerging equities, value sectors, such as banks, and US and UK small and mid-caps. Riskier bonds, such as emerging debt and convertible bonds, enhance the strategy. In the most recent fine-tuning of our cross-asset strategy - as we move from a recession year to a recovery year - we trimmed our exposure on European and US Investment Grade bonds.

CROSS ASSET STRATEGY

• As visibility is improving, we are slightly overweight equities and are exposed to US small and mid-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 key Brexiteers from Number 10.
  • We remain overweight emerging markets equities vs. underweight Japanese equities and have a preference for the Chinese equity market. China emerges stronger as the year comes near its end.
  • 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 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, including in 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, we are overweight emerging debt and trimmed our allocation to European and US investment grade bonds.
  • We hold GBP, likely to re-rate with a soft Brexit. We hold 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.