Coffee Break 2/1/2021

INVESTMENT CONVICTIONS

• Core scenario
  • In our central scenario, we take into account the slower than expected vaccine rollout and the unfortunate virus mutation, which might delay herd immunity. 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 a strong growth in corporate profit and financial markets will likely see the return of buybacks positively.
  • In the US, president Joe Biden and his White House administration have the advantage of a unified Congress thanks to the outcome of the Senate elections in Georgia. The prospect of additional stimulus after the Democratic sweep improves the investment horizon. 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 the end of social distancing in 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.
  • Our main convictions remain as follows:
    • The economy is driven by the virus, and the mutations represent a blow. Markets are driven by the vaccine and the inoculations are the game changer.
    • We have an exposure to recovery-related assets: Overweight Equities vs. bonds, European and US banks, US small and mid-caps, UK 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.

• Market views
  • 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. The rotation is likely to continue into H1 2021.
  • From a longer-term perspective, ultra-accommodative fiscal and monetary policies and the vaccine becoming a reality should support the transition from a mechanical rebound to a sustainable recovery of the economy.

• Risks
  • The coronavirus pandemic is the main obstacle to the 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. Joe Biden was inaugurated on 20 January 2021. Prospects of more government debt push 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, it adds 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

The 2021 recovery shall be accompanied by a catch-up in growth and a rebound in corporate earnings. We are overweight equities but with a protective derivative strategy on European equities to protect against potential short-term market volatility. We keep a positive assessment for European and Emerging equities, value sectors, such as banks, and US and UK small and mid-caps. We recently added exposure to commodities. 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 newly introduced currency-based 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 first half, we prefer equities – less expensive than bonds despite high valuation.
  • We are overweight EMU and UK equities. We remain overall neutral Europe ex-EMU. European equities will benefit from the turn in market drivers vs. pandemic.
  • We remain overweight emerging markets equities and have a preference for the Chinese equity market. China emerges stronger.
  • 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.
  • We hold GBP, having reached some of its lowest levels since the Brexit referendum. We hold NOK, which appeared attractive during the crisis, as well as gold and the JPY, which are risk mitigators. We remain cautious on the US dollar.
  • We recently added exposure to the rising prices of commodity, through a basket of currencies, including the AUD, the CAD and the NOK.