LAST WEEK IN A NUTSHELL
- The IMF cut its 2020 forecast for the world economy to a contraction of -4.9%, and worse for the developed markets. Consumer spending is hit harder than in previous downturns due to lockdowns.
- Global flash PMIs for June reflected the recent positive momentum coming through and the global recession easing. The US flash PMI index has risen from 37 to 46.8.
- As lockdowns continue to ease in the euro zone, the June consumer confidence jumped more than expected. The index for the 19 surveyed countries improved by 4.1 points to -14.7
- The US Department of Defense published a list of 20 companies that allegedly have close ties to the Chinese military, reviving tensions between China and the US. Markets reacted nervously.
- Within the tension between Covid-19 waves and the policy stimulus, all eyes will be on the Southern states of the US to gauge their measures to reign in the spreading of the virus.
- Global PMIs are due to be released. Markets expect further upside, like with the preliminary figures, even if they are still expected to signal a contraction (i.e. below 50 points) in most countries.
- On Thursday, the US will publish its monthly job report for June. After the surprise decline last month, forecasts are for a further decline.
- The new round of Brexit negotiations is likely be dwarfed by the meeting of French President Macron and German Chancellor Merkel. Germany will preside over the EU council for the second semester.
- Core scenario
- Recent market performance has revealed two messages: First, stay with the medium-term “winners” of the crisis (e.g. Technology, Healthcare, Sustainable themes) and, second, enter positions in assets at historically attractive valuation levels, also providing investment opportunities (we have identified Emerging market debt, value sectors, cheap currencies and euro zone equities relative to US ones).
- We are watching various epidemic indicators to assess our stance.European and Asian re-openings have been going well with increasing mobility and contained new case growth. However, the recent contrast between the US and EU-27 (hence including Sweden) is ever more striking in recent days as new daily infections hit new highs.
- In the medium term, policy easing from virtually all central banks and fiscal easing represent a support. The Fed, the ECB, the BoE and the BoJ keep on easing policies further.
- From a short-term perspective, some reassurance can be found in the bottoming of economic figures and the rise in economic surprises. Volatility is nevertheless here to stay as visibility on the epidemic and its aftermath remains low.
- Market views
- Most countries have reached their peak in terms of active Covid-19 cases, except for the Americas. The epicentre is now on both parts of the American continent.
- Mobility indicators continue to improve gradually but are becoming less useful as the incremental changes are becoming too small to be informative.
- Fiscal and monetary policy responses will outlive the virus. Monetary policy responses aim at ensuring ample liquidity and, for some regions, further asset purchases programmes.
- The European political response has given some reassurance: policymakers have addressed several flaws in the past weeks successfully which could result in a decline in euro zone equities’ risk premium. The past weeks could be seen as the fiscal equivalent to the monetary “Whatever it takes”.
- The coronavirus is a risk until it is contained or a vaccine is found, successfully tested, mass-produced and commercialised. A second wave is possible but a worldwide generalised shutdown is unlikely.
- US election risk. The handling of the coronavirus crisis, economic strains, social unrest and upcoming presidential elections are triggering uncertainty at a time when valuation is no longer appealing vs. historical levels. A Democratic sweep could represent a risk for the stockmarket (tax reform and regulation).
- The US-China relations will likely remain on edge and are clouding global growth. The Defense Department made public for the first time a list of Chinese companies that are operating in the U.S. and are tied to the Chinese military.
- Trade negotiations between the UK and the EU. EU negotiator Michel Barnier expects the “moment of truth” for any potential trade deal in October. A “thin” free trade agreement is a realistic assumption.
RECENT ACTIONS IN THE ASSET ALLOCATION STRATEGY
We are underweight equities while keeping a pro-risk exposure within our portfolio (“Barbell strategy”). We express our pro-risk stance via a bias towards value sectors, including banks, holding emerging markets debt (in both LC and HC) and European corporate bonds, as well as having a currency exposure towards the NOK. In addition to our underweight equity stance, we hold a protective derivative strategy on both US and European equity markets. Gold and JPY act as risk mitigators. The market has become vulnerable to disappointments. We currently have a higher exposure to EMU equity vs. US ones, as the former benefits from a handful of relative drivers, including a strong and coordinated policy response, better virus control, relative cheapness and light positioning.
CROSS ASSET STRATEGY
- Our equity exposure is slightly underweight, while increasing the relative exposure towards the eurozone.
- We have become overweight EMU equities vs. US. Policymakers have successfully addressed several flaws in the past weeks which could result in a decline in EMU’s risk premium.
- We have become underweight US equities. The handling of the coronavirus crisis, economic strains, social unrest and upcoming presidential elections are triggering uncertainty at a time when valuation is no longer appealing vs. historical levels.
- We stay slightly underweight UK. Covid-19 has changed priorities in the UK. A “thin” free trade agreement (incorporating zero-tariff/zero-quota trade in goods, but significant non-tariff barriers on trade in services) is a realistic assumption. A no-deal end to the transition would hit foremost UK domestic stocks.
- We stay neutral Japanese and Emerging markets equities. Uncertainty surrounding the aftermath of the coronavirus crisis weighs on investors’ sentiment. On the other hand, the fiscal and monetary responses are massive.
- 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 such as European banks 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 and circular economy themes enable exposure to key solutions for a cleaner future. We 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. We prefer peripheral bonds vs. core European countries.
- In a multi-asset portfolio, diversification into credit appears 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 have an exposure to the NOK, which appeared attractive during the crisis, as well as gold and the JPY which are risk mitigators.