LAST WEEK IN A NUTSHELL
- The unique bullish macroeconomic environment was confirmed by Chinese trade data and retail sales, European new car-registrations, US retail sales and regional business confidence surveys.
- Fed Chairman Jerome Powell stuck to a dovish script saying that asset purchase tapering “would in all likelihood be before -- well before -- the time we consider raising interest rates”
- Joe Biden’s economics team has double checked the Fed’s inflation forecasts, to make sure the US stimulus doesn’t cause an inflation leap, while CPI rose by 2.6% YOY in March.
- The UK progressively emerges from lockdown as almost 50% of the population have received their first vaccination. Meanwhile, the variant B.1.617, first detected in India and more resistant to the body’s immune response, was found in the UK.
- Markets will follow the ECB meeting and the release of the April flash PMIs from around the world. They will also be paying attention to the Q1 earnings releases from 80 S&P500 companies.
- President Joe Biden will invite 40 world leaders to a "Leaders’ Summit on Climate".
- In Germany, Greens and CDU/CSU are expected to rally behind their newly-announced respective candidates for chancellorship for the upcoming September’s federal election.
- Geopolitical tensions between the US and Russia will drive focus, as President Biden sanctioned the latter while calling for a "stable and predictable" relationship.
- Core scenario
- Our scenario of a global economic rebound, followed by a genuine growth-driven recovery, is unfolding. Recent market moves have put the focus on our investment convictions. The mechanical rebound of growth shall be followed by a transition supported by central banks and governments towards a sustainable recovery. The accumulated consumer savings will likely support a COVID-19 sensitive spending rebound, igniting hereby a positive feedback loop in the economic recovery.
- In the US, bond yields have stabilised for now but fiscal stimulus, large supply, economic recovery and vaccine rollout might support higher rates this year.
- In Europe, our central scenario assumes a comeback to growth trend by end-2021 and an implementation of the Next Generation EU plan in H2. Economic indicators reveal a large gap to be filled between services and manufacturing, as the latter has already started to benefit from the global economic rebound. Hence, the reflation trade could well move into a next stage as external demand surges and domestic demand is set to recover.
- Market views
- Financial markets are undergoing a “normalisation phase” in a unique bullish macro environment. In spite of rising bond yields, it appears too early for the era of “There Is No Alternative” to be called into question.
- Flows into equities continue from both private and institutional investors as the environment currently remains compatible with equity upside - under the condition that earnings growth does not disappoint.
- We have exposure to recovery/re-opening related assets: Overweight equities vs. bonds, preference for ex-US to US equities, keep European and US banks, US and UK small and mid-caps, and exposure to commodities, GBP and NOK.
- Simultaneously, our core portfolio keeps the most resilient themes and countries.
- The duel virus vs vaccine. Vaccinations have the upper hand currently, but the appearance of new variants and the transition towards an endemic virus will raise new questions.
- Uncontrolled rise in bond yields. For the moment, central banks lack an exit plan from super-low interest rates. While bond yields have stabilised for now, inflation expectations could still point to fears from a demand shock and overheating growth.
- Geopolitical tensions. Revived tensions between China, and/or Russia, and the US can no longer be excluded, especially since the US has recently sanctioned Russia.
- Political uncertainty: The social divide is widening between losers and winners of the health crisis and several countries have elections coming up in the next 12 months starting with Germany which will elect a new Parliament in September.
RECENT ACTIONS IN THE ASSET ALLOCATION STRATEGY
Financial markets are in an unique bullish macroeconomic environment as the “normalisation phase” is under way. In that context, on the fixed income side, bond yields have recently stabilised but should continue to rise this year (both real and nominal). Accordingly, we remain underweight government bonds. On the equity side, the transition has cleared up some uncertainties causing a decline in volatility, while sectorial rotation towards value and cyclical sectors is still at play. Hence, we remain overall overweight equities and our strategy is geared towards reflation trades and long-term winning sectors. We expect that commodity prices should benefit from the catch-up in demand. Recently, we took profit on our relative trade on transatlantic sovereign spreads. We recently increased exposure to Japanese equities vs. US equities. We slightly decreased our global overweight exposure to the banking sector to finance the purchase of consumer staples names.
CROSS ASSET STRATEGY
- 2021 is a recovery year and we anticipate a strong profit rebound. We still prefer equities over bonds. We prefer equities over bonds in this context.
- We stay overweight European equities, especially euro zone and UK. European equities will benefit from the turn in market drivers vs. pandemic. The successful vaccine rollout is a game changer for the UK economy as activity picks up faster than on the continent. In addition, UK equity valuations still remain relatively attractive.
- We remain overweight emerging markets equities, with an exposure to Latin America as the region offers high exposure to value assets with attractive valuation and strong potential for a rebound.
- We are underweight US equities, as strong global growth should be beneficial to other regions. We keep our overweight US banks and small and mid-caps to capture strong domestic demand.
- We are overweight Japanese equities, as high correlation to global PMI new orders imply strong operational leverage in a context of accelerating global growth.
- We keep key convictions in various long-term thematic investments. In particular, Oncology and Biotech sectors 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.
- We keep a short duration on government bonds
- In a multi-asset portfolio, we focus on the source of the highest carry, i.e. emerging debt. We stay neutral US and European investment grade credit.
- We reduced our exposure to JPY vs. USD and gold.
- We have an exposure to rising commodity prices, via a basket that also includes currencies, such as the AUD, the CAD and the NOK and remain long GBP.