Coffee Break 5/18/2020

INVESTMENT CONVICTIONS

• Core scenario
  • Recent market performance has revealed two messages: Stay with the “winners” of the crisis (e.g.Technology, Healthcare, Sustainable themes) and start looking for assets at historically attractive valuation levels, providing investment opportunities (e.g. Emerging market debt, value sectors in Europe, cheap currencies).
  • We are watching various indicators linked to the epidemic: Market risk, Activity resumption, the Policy response and Valuations. The definition and implementation of exit strategies are currently the main focus, especially given that a second surge in the epidemic is a possibility.
  • 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
  • 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” but failed to come to an agreement. The North vs South divide is widening.
  • The US-China relations will likely remain on edge and are 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

While we remain overall slight underweight equity exposure, we upgrade our views on US equitiy from underweight to neutral. There is an improved risk/reward ratio for a long-term investor but volatility remains. Patience is key in this recovery. In the fixed income universe, we diversify out of government bonds via US and European investment grade exposure and emerging markets debt in both local and hard currency. We also stay diversified via alternative strategies. We hedge via derivatives, gold, the JPY and recently the NOK.

CROSS ASSET STRATEGY

• Given the lack of visibility, our equity exposure is slightly underweight.
  • We are slightly underweight UK. The country faces the coronavirus challenge and the renegotiations of trade relations not only with EU members but also with other countries as they are starting from scratch. There is also a lack of visibility on the epidemic in the UK and its impact.
  • We are neutral on all other regions, without any strong conviction. Uncertainty surrounding the coronavirus weighs on investors’ sentiment On the other hand, the fiscal and monetary responses are massive, especially in the US.
  • Since the onset of the coronavirus crisis, some assets have been badly hit and now offer historically attractive valuation levels, providing investment opportunities. While it is not easy to find the best entry point, it makes sense for long-term investors to strengthen some positions opportunistically. For instance “value” sectors are already integrating a lot of bad news.
  • 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. Climate action themes enable exposure to key solutions for a cleaner future. We also believe that sustainability will continue to gain in importance for the social and environmental aspects. A robust governance appears to deliver better results during the pandemic, both at company and state level.
• 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 which provide no return potential except in risk-off phases.
  • In a multi-asset portfolio, diversification into credit appears more attractive: we are overweight US and EUR investment grade as central banks buying represent a support.
  • We are also overweight Emerging debt, including corporate bonds, in both local and hard currency.
  • We keep an exposure to gold and JPY, which both play the role of safe haven. We recently added NOK as the Norges Central Bank has put a limit to the sharp depreciation of its currency.