LAST WEEK IN A NUTSHELL
- The US Treasury announced it was ending its emergency loans programme. Markets reacted nervously as investor sentiment was hit. Simultaneously, COVID-19 hospitalisations are on the rise in the US.
- The G20 Leaders' Summit took place virtually, hosted by Saudi Arabia. Discussed themes included opportunities of the 21st century for all and overcoming the pandemic.
- Sticking points for the Brexit negotiations remained the same: fishing rights, guarantees of fair competition and ways to solve future disputes.
- In a small step along the road to recovery, Pfizer and BioNTech requested FDA emergency authorization of their COVID vaccine. In Europe, the EMA already started its rolling review. A rollout seems possible by year-end.
- Attention will remain on the pandemic as governments across the world continue to impose restrictions in order to contain the spread of the virus.
- Flash PMI surveys will be released providing insights into the state of business conditions during the new infection wave, post-US elections and COVID-19 vaccines announcements.
- The US Fed will publish its most recent FOMC Minutes. Policy was left unchanged awaiting the elections result. The emphasis is likely on the importance of both fiscal and monetary stimuli.
- Updated Q3 GDP estimates for the US, the euro zone and Singapore are due. The dispersion in the euro zone Q3 activity is expected to persist as Germany benefited from strong factory-led growth.
- Core scenario
- In our central scenario, we passed the peak in uncertainty. Financial markets are integrating the improving news flow on the vaccine and US elections, in waves. Fiscal and monetary support will remain present. The transition towards the president elect Joe Biden might not be smooth and COVID-19 infections are on the rise in some regions.
- In the US, Donald Trump faces defeat but has yet to concede to President elect Joe Biden.
- The coronavirus continues to spread and the probability for a strong fiscal stimulus package has diminished, although some support appears possible during the “lame-duck” session.
- In Europe, ongoing Brexit negotiations and new coronavirus curbing measures may challenge the recovery in activity in the short term.
- In Europe, the monetary policy response will still be present as the ECB has pre-committed to a December easing, beyond PEPP. Additional fiscal policy measures have been announced as mobility restrictions are tightened. Pay-outs from the EU recovery fund should however provide only a small stimulus next year compared to the negative growth shock registered in 2020.
- Our main convictions remain as follows:
- The next market catalyst seem just weeks away: Brexit.
- As we move towards better visibility, we have an exposure to recovery-related assets: US small caps relative to the US market, UK mid-caps and GBP and convertible bonds.
- Simultaneously, our core portfolio remains geared towards the most resilient themes and countries post sanitary crisis while keeping protections on the US equity market.
- Market views
- From a short-term perspective, the likely take-away of the US elections is less government spending and less tax hikes.
- Unless COVID-19 infections deteriorate materially and trigger more restrictive lockdowns for longer, volatility has likely peaked end-October but the US presidential elections outcome has yet to be accepted and implemented.
- Historically, economic recovery (and rising bond yields) have been a support for value style performance. The progress toward a COVID-19 vaccine prompted investors to rotate from the “stay-at-home” stocks to companies that benefit from the economic recovery, i.e. cyclical and value sectors.
- From a longer-term perspective, ultra-accommodative fiscal and monetary policies and the vaccine becoming a reality should lead to a recovery of the economy.
- The coronavirus pandemic is the main obstacle to the economic recovery this winter. The Emergency Use Authorization (EUA) for a vaccine is possible by year end with a full US Food and Drug Administration approval by the end of Q1 2021.
- US election outcome. Joe Biden won but most likely faces a divided Congress. A large fiscal stimulus and significant tax hikes seem off the table in a gridlock scenario for the next 2 years.
- Trade negotiations between the UK and the EU. The UK’s Brexit deadline is fast approaching and the country still lacks a definitive deal with the European Union. Boris Johnson cannot afford to stay on the current collision course with the EU and with the US.
- Political uncertainty: The social divide is widening between losers and winners of the health crisis.
RECENT ACTIONS IN THE ASSET ALLOCATION STRATEGY
We are slightly overweight equities, confident that medium-term perspectives have improved. There is a positive assessment for European and Emerging equities, value sectors, such as banks in both Europe and the US, and US and UK small caps. European and US Investment Grade bonds, and riskier bonds, such as emerging debt and convertible bonds enhance the strategy. We keep protections on US equities.
CROSS ASSET STRATEGY
- Visibility is improving. We are now slightly overweight equities and are exposed to US small caps vs the US equity market, to the UK mid-caps and convertible bonds.
- We are overweight EMU and UK equities and remain overall neutral Europe ex-EMU. The likelihood of a Free Trade Agreement with the European Union has increased with the election of Joe Biden in the US and the departure of key Brexiteers from Number 10.
- We remain overweight emerging markets equities vs. underweight Japanese equities and have a preference for the Chinese equity market. China emerges stronger as the year comes near its end.
- 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. 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 government bonds which provide no return potential except in risk-off phases. We prefer peripheral bonds vs. core European countries.
- In a multi-asset portfolio, diversification into credit appears attractive as it brings carry. We are overweight European and US investment grade bonds as well as Emerging market debt.
- We hold GBP, likely to re-rate with a soft Brexit. We hold NOK, which appeared attractive during the crisis, as well as gold and the JPY, which are risk mitigators.
- Our conviction in the structural reduction of the euro zone risk premium leads us to be short USD vs EUR.