LAST WEEK IN A NUTSHELL
- 20.5 millions. That is how many jobs were lost in the US in April. The number is staggering but financial markets took it well, as it had been anticipated via the weekly reported figures.
- The Bank of England has kept its stance unchanged and is on standby to take further action, including another QE. The BoE surprised in forecasting a GDP contraction of -15% in 2020, followed by +15% in 2021.
- The UK and the US launched formal negotiations on a free trade agreement, under pressure to find ways to counteract the coronavirus impact, and finish ahead of the EU/UK negotiations.
- The German constitutional court (GCC) ruling is a reminder of a permanent threat to the ECB’s ability to operate as a fully-fledged central bank, although the GCC has no authority on the ECB.
WHAT’S NEXT?
- US President Trump estimates that the Coronavirus outbreak “sort of overrides” trade progress made so far with China. It has to be seen if heightened rhetoric will be followed by retaliatory measures.
- It is far from being a one-size-fits-all “Exit Strategy”. Governments will keep making announcements on gradual re-opening, as the outbreak is now considered broadly under control in most countries of the Northern hemisphere.
- The US, the UK, China, and the euro zone will publish inflation-linked data. The shutdown of economies to contain the virus and the related layoffs could result in deflationary pressures.
- Germany and the UK will release flash Q1 GDP rate. Forecasts are deeply negative single digits QoQ.
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INVESTMENT CONVICTIONS
- Core scenario
- We are watching 5 different triggers: Epidemic-linked indicators, Market risk, Activity resumption, the Policy response and Valuations. The implementation of exit strategies are currently the main focus.
- The global economic growth contracts as activity came to a halt and social distancing impacted both supply and demand while benefiting specific sectors: Technology, health care, and, in the mid-term, sustainable energy and infrastructures.
- 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 a kickstart of the economy at a future stage, especially if deflation sets in.
- From a short-term perspective, volatility is here to stay as visibility on the epidemic 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. By the same token, re-opening economies is not a one-size-fits-all measure.
- 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 against Donald Trump.
- 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 keep a slight underweight equity exposure. There is an improved risk/reward ratio for a long-term investor but volatility remains. Patience is key in this U-shaped recovery. In the fixed income universe, we are adding to our overweight exposure to emerging markets debt in both local and hard currency. We have recently become overweight US and European investment grade exposure. We remain cautious about exposure to government rates. We stay diversified via alternative strategies. 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. The economy has taken a massive blow and unemployment is hitting high records. Confinement measures widely differ between countries. There is also a lack of visibility on the epidemic in the UK and its impact.
- 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, but highly diversified as the current environment has the potential to create opportunities on bond markets.
- We are underweight government bonds.
- In credit, we added to our investment grade exposure in the US and in Europe and are overweight.
- We added to our exposure to Emerging debt, including EM-issued corporate bonds, in both local and hard currency.
- We keep an exposure to gold and JPY, which both play the role of safe haven.
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