LAST WEEK IN A NUTSHELL
- Trump’s administration´s decision to allow the presidential transition to finally begin boosted investor sentiment. So did the expected appointment of Janet Yellen to the post of Treasury secretary.
- US financial markets were closed last Thursday as the country celebrated Thanksgiving, followed by an early shutter on the traditional Black Friday, the kick-start of the holiday retail season.
- In terms of data, U.S. weekly jobless benefit claims rose for a second week to a five week high, while October durable goods orders rose by only 0.2% excluding defence spending.
- The Fed released the November FOMC minutes. It revealed possible changes in the asset purchase programme, without indicating a firm date, and members´ concern about the pace of economic growth.
- In Europe, as various coronavirus-curbing measures are in place so close to the holiday season, data on business climate, consumer confidence and economic sentiment dipped.
- Manufacturing and Services PMIs are expected to highlight the divergence in regional activity.
- The US December’s job report is due after the weekly jobless claims rose mid-November. Forecasts expect a meagre creation of 500K nonfarm payrolls.
- Inflation-related data is expected for the euro zone and other key countries but without much change expected.
- In the aftermath of Thanksgiving in the USA, the COVID pandemic along with potential progress on a vaccine will remain an important focus.
- Core scenario
- In our central scenario, the US elections and the announcement of an efficient vaccine triggered a relief rally on financial markets. The improving news flow is being integrated in waves and markets will oscillate with consolidation phases too. 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, especially with the holiday season getting started.
- In the US, Donald Trump’s administration has already given the green light for a formal transition. But President Trump has yet to concede officially, as it is usually the custom.
- 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, and US and UK small caps. Riskier bonds, such as emerging debt and convertible bonds, enhance the strategy. In the most recent fine-tuning of our cross-asset strategy - as we move from a recession year to a recovery year - we trimmed our exposure on European and US Investment Grade bonds.
CROSS ASSET STRATEGY
- As visibility is improving, we are 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, we are overweight emerging debt and trimmed our allocation to European and US investment grade bonds.
- 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.