LAST WEEK IN A NUTSHELL
- In the US, daily new coronavirus cases appear to be plateauing in opened states, while a clear decreasing trend is observed among the closed states and in most European and Asian countries.
- May flash PMI releases revealed better than expected figures hinting that the rate of collapse might have peaked in April. Numbers are however drastically low.
- The US Senate approved legislation that could ultimately bar many Chinese companies from listing shares on US exchanges, or otherwise raising money from American investors.
- China opened its National People’s Congress with the main topics including plans to revive the economy and the passing of a controversial national security law aiming at tightening its grip on Hong Kong.
- More details will be released throughout the Chinese NPC. The package announced so far will focus on qualitative growth targets and on infrastructure spending but less on consumption support.
- The euro zone and the US will publish soft data on business confidence, business climate and consumer sentiment, confirming – or not – that April saw a first bottom in leading data.
- After last week’s Franco-German €500bn initiative, the European Commission is set to outline a proposal for the EU budget and the Recovery Fund.
- The Fed and the ECB’s respective Chairman and President will adress the public.
- 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 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
- Most countries have reached their peak in terms of active Covid-19 cases. 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. Re-opening economies is a necessity and will not be 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.
- 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 keep a cautious exposure as we remain slightly underweight equities. Markets are trading in a range since mid-April and we are waiting for a clear trigger to take a stronger directional view. We have a barbell-type strategy in place: on the one hand, we keep a rather cautious exposure to equities and have increased our allocation to European Investment Grade credit. On the other hand, we added more beta to our balanced strategy over the last weeks, having invested on 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 is key in this recovery.
CROSS ASSET STRATEGY
- Given the lack of visibility, our equity exposure is slightly underweight.
- We are slightly underweight UK. The country faces two simultaneous challenges: getting the coronavirus under control as the country currently has the highest death toll in Europe and racing toward a self-imposed deadline to a new trade agreement with the European Union, its single biggest market for exports.
- 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.