LAST WEEK IN A NUTSHELL
- Activity appears to have bottomed out, mid-May in the euro zone vs. end-April in the US. Mobility indicators continue to improve, reflecting the gradual easing of lockdowns
- The publications of PMIs for the month of May in the US, China and the euro zone confirm the gradual factory recovery from paralysis.
- The shorter and delayed Chinese NPC focused on qualitative growth target, as budget deficit will rise and efforts appear to focus on infrasture investment, including 5G.
- As China is tightening its grip on Hong Kong, threatening fundamental political freedoms and civil liberties, international relations are deteriorating fast.
- In the context of an US election in 5 months the “hold China accountable” rhetoric is growing. Investor sentiment is hurt as punitive action on global trade is feared.
- The ECB could announce an increase in its Pandemic Emergency Purchase Programme. The ECB will detail its forecasts on the economic contraction in 2020 (in an expected range of -8% to -12%).
- The monthly US job report will be released and is expected to shed further light on the damage created by the coronavirus lockdown. Last week’s decline in continuing claims are a ray of hope.
- Brexit will return to the headlines as another negotiating round between the UK and the EU takes place.
- Core scenario
- Recent market performance has revealed two messages: Stay with the medium-term “winners” of the crisis (e.g.Technology, Healthcare, Sustainable themes) and start looking for assets at historically attractive valuation levels, also providing investment opportunities (we have identified Emerging market debt, value sectors in Europe or cheap currencies).
- We are watching various indicators to assess our stance: those linked to the epidemic: Market risk, Activity resumption, the Policy response and Valuations. The implementation of exit strategies is currently one of main focus, along with finding a vaccine - 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, some reassurance can be found in the bottoming of economic figures and economic surprises. Volatility is nevertheless here to stay as visibility on the aftermath of the epidemic remains low.
- Market views
- Most countries have reached their peak in terms of active Covid-19 cases. Today, three countries account for half of the active cases: the US, Russia and Brazil. The epicentre has now moved to South America.
- Confinement and social distancing measures have widely differed from country to country. But the economic impact and fall in activity has been massive for all. The current re-opening of economies is a necessity and 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.
- The coronavirus is a risk until it is contained or a vaccine is found, successfully tested, mass-produced and commercialised. Six (out of 118) vaccine-producing candidates are currently in the lead with three anticipated waves of potential vaccines available commercially starting at the end of 2020.
- The European political response needs to be improved. EU leaders agreed on the need for a European Recovery Fund post “corona” but so far 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
We have a slightly underweight equities exposure and continue to reinforce our exposure to still-lagging value/cyclical sectors. We are close to the top of the identified trading range but markets have yet to show a stronger directional view. Our barbell-type strategy gives a combination of (1) a rather cautious exposure to equities overall and increased allocation to European Investment Grade credit and (2) more beta to our balanced strategy via attractively valued assets such as European banks, automobiles, emerging debt and the NOK. There is an improved risk/reward ratio for a long-term investor but volatility remains. Patience remains key in this recovery.
CROSS ASSET STRATEGY
- Given the lack of visibility, our equity exposure is slightly underweight.
- We are slightly underweight UK. Covid-19 has changed priorities in the UK. There is rising concern about a no-deal end to the transition period for the UK’s exit from the EU. A ‘thin’ free trade agreement (incorporating zero-tariff/zero-quota trade in goods, but significant non-tariff barriers on trade in services) to be struck by the end of the year is a realistic assumption. A no-deal end to the transition (or just rising uncertainty around any deal or lack thereof) would hit foremost UK domestic stocks.
- 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 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 and their accompanying flight to quality.
- 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, JPY and NOK, which play safe-haven roles.