LAST WEEK IN A NUTSHELL
- The US released a bumper job report. In spite of snow storms, the economy created 379K jobs vs. 200K expected. The private payroll number was even better at 465k vs 200k expected.
- Investors´ concerns rose along with US bond yields. Global equities were under pressure again while European, incl. UK, equities, value sectors and commodities resisted well.
- Long duration stocks (including Technology) continued to fall, as Fed Chairman Jerome Powell stated that the rise in inflation was unlikely to last and current monetary policy remained appropriate.
- PMIs for key countries confirmed the positive trend in manufacturing activity. The services areas of the global economy will likely revive as the economy reopens.
- ECB President Christine Lagarde will certainly reveal her take on rising bond yields, economic recovery, outlook and bond purchase programme right after the Governing Council meeting.
- In the US, Democrats hope to get the corona relief bill to President Joe Biden’s desk before March 14th , the expiration date of the unemployment aid programme. Republican opposition is slowing the process.
- Data highlights include US inflation-related data (such as producer prices) and the University of Michigan preliminary survey results on consumer sentiment and inflation expectations.
- Vaccination programmes, diverging restrictions, a digital health passport for inoculated citizens will remain the focal point.
- Core scenario
- Our scenario of a global economic rebound, followed by a genuine recovery, is taking shape and recent market moves have put the focus on our investment convictions. In our view, financial markets this spring are likely to be influenced by the next steps in the fight against the pandemic. The mechanical rebound of growth shall be followed by a transition supported by central banks and governments towards a sustainable recovery.
- In the US, Joe Biden and his administration have the advantage of a unified Congress, which will support the newly-announced fiscal stimulus plan. US rates are increasing. A point of equilibrium should be found between a renewed interest for US bonds without jeopardising the recovery if the increase is too steep and/or too fast.
- In Europe, our central scenario assumes a comeback to growth trend by end-2021 and a implementation of the Next Generation EU plan in H2. A close look at the economic indicators reveals that there is still a large gap to be filled between services and manufacturing, as the latter has already started to benefit from the economic rebound. Hence, the reflation trade could well move into a next stage as the economy reopens. The accumulated consumer savings will likely support a COVID-19 sensitive spending rebound, igniting hereby a positive feedback loop in the economic recovery.
- Market views
- An economy still driven by the virus and the variants whereas markets are driven by the speed of vaccine rollout as well as strong expectations in improving corporate earnings.
- Inflows in equities continue from both private and institutional investors in spite of increasing yield.
- We have exposure to recovery-related assets: Overweight equities vs. bonds, European and US banks, US and UK small and mid-caps and GBP, and exposure to commodities.
- Simultaneously, our core portfolio remains geared towards the most resilient themes and countries while keeping protections on the European equity market.
- Virus vs vaccine rollout: The risks associated with the epidemic have not completely disappeared and the disease will likely become endemic. Some European countries may announce new containment measures and could disappoint on the economic recovery in H1. The vaccine rollout appears underwhelming so far and the recent mutation of the virus could lead to increased efforts to reach herd immunity later this year.
- Rising bond yields following the US political transition. Prospects of more government debt are pushing investors away from Treasuries, as the curve steepens, with the 10Y yield floating higher. Also, as additional large fiscal spending on infrastructure is being discounted, this is adding momentum to yields.
- Geopolitical tensions : Tensions between China and the US could be back, with Taiwan crystallizing discord, although the Biden administration is managing diplomatic relations in a more consensual manner.
- Political uncertainty: The social divide is widening between losers and winners of the health crisis.
RECENT ACTIONS IN THE ASSET ALLOCATION STRATEGY
Rising government bond yields, especially in the US and Germany, supported a rotation away from stay-at-home stocks and towards the post-pandemic era. We remain overweight equities and we take advantage of the reflation trade and value stocks, as they should benefit from current upward pressures. The vaccine rollout continues with various degree of success and we hedge against possible short-term disappointments in the market. Regionally, we remain overweight European and Emerging Markets equities. We keep a neutral stance on US and Japanese equities. In terms of sectors, we have exposures to value sectors, such as banks, US and UK small and mid-caps and thereby participate in the reflation/re-opening underway. In addition, we are short duration, neutral credit, have an exposure to commodities, and are long GBP, among others. On the other side of our barbell strategy, there is a positive assessment for the long-term winners of the sanitary crisis: Health Care, EU Green Deal beneficiaries, and technology.
CROSS ASSET STRATEGY
- 2021 shall be a recovery year and we anticipate a strong profit rebound. We prefer equities – less expensive than bonds despite high valuations in some pockets of the market.
- We are 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 should pick up faster than on the continent. In addition, UK equity valuations still remain relatively attractive.
- We remain overweight emerging markets equities and have a preference for the Chinese equity market. China emerges stronger and is keeping its lead.
- We are neutral US equities, with a preference for US banks and small and mid-caps.
- We are also neutral Japanese equities.
- We keep key convictions in various long-term thematic investments. Global Technology, 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, including in convertible bonds.
- We are underweight core government bonds and overweight European peripheral government bonds.
- In a multi-asset portfolio, we focus on the source of the highest carry, i.e. emerging debt. We are neutral US and European investment grade credit.
- In addition to GBP, we hold gold and the JPY, which are risk mitigators. We remain cautious on the US dollar.
- We have an exposure to rising commodity prices, via a basket that also includes currencies, such as the AUD, the CAD and the NOK.