Coffee Break 2/15/2021

INVESTMENT CONVICTIONS

• Core scenario
  • In our central scenario, we have taken into account the slower-than-expected vaccine rollout and the unfortunate virus mutation. The current circumstances do not call into question the mechanical rebound of growth followed by a transition supported by central banks and governments towards a sustainable recovery in the Western hemisphere. H1 2021 will see strong growth in corporate profit and financial markets will likely look favourably on the return of buybacks.
  • In the US, Joe Biden and his administration have the advantage of a unified Congress. Democrats are hoping to get the president’s USD 1.9 trillion stimulus package through the House by the end of February and signed by the president by mid-March. The objective is to prevent an unemployment benefits cliff. Also, Joe Biden signed a series of executive orders designed to address climate change, whose impacts he compared to the pandemic.
  • In Europe, our central scenario assumes a comeback to growth trend by end-2021 and a swift implementation of the Next Generation EU plan. Germany will elect a new Chancellor in the autumn ending thereby the Merkel era after 16 years. Italy has nipped a political crisis in the bud: Mario Draghi, a fervent pro-EU voice, will succeed Giuseppe Conte as PM and will have around 200bn EUR in recovery funds to spend.

• Market views
  • An economy driven by the virus, and the mutations representing a blow. Vaccine-driven markets and the inoculations are game-changers.
  • 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.

• Risks
  • The coronavirus pandemic is the main obstacle to economic recovery. 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 the larger fiscal spending on infrastructure is being discounted, this is adding momentum to yields.
  • Political uncertainty: The social divide is widening between losers and winners of the health crisis.

RECENT ACTIONS IN THE ASSET ALLOCATION STRATEGY

2021 is a recovery year and not just in terms of activity. The coronavirus has mutated and its variants might challenge the efficacy of the vaccines. We stay overweight equities and hedge against possible short-term disappointments in the market. In terms of equities, we recently added further to our UK equities exposure and in GBP. We remain overweight euro zone and emerging markets equities. We stay neutral US and Japanese equities. In terms of themes, we have exposures to value sectors, such as banks, and US and UK small and mid-caps. There is also a positive assessment for the long-term winners of the sanitary crisis: Technology, Health Care, and EU Green Deal beneficiaries, among others. Riskier bonds and a recently introduced commodity-proxy enhance the strategy. 2021 will require continuous active management and agility.

CROSS ASSET STRATEGY

• 2021 shall be a recovery year and as we anticipate a strong rebound we prefer equities – less expensive than bonds despite high valuations.
  • We are overweight EMU and recently reinforced our overweight UK equities, in GBP. 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 remain still 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 thematic investments. Global 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 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.