Last week in a nutshell
- As widely expected with a 2% annual rate during Q3, the US economy expanded at its slowest pace in over a year. Falling coronavirus infections and large rises in nominal wages and salaries are pointing to a better Q4.
- ECB president Christine Lagarde tried to explain that the currently high inflation rate is not expected to remain over the medium term. Bond markets were not convinced and remained volatile.
- The rise in inflation expectations has not impacted the economic sentiment indicator in the euro zone, which unexpectedly rose in the month of October.
- The earnings season continues to show strong results, providing a support for risky assets. Margins expand as corporate pricing power remains high in an environment marked by strong demand.
What’s next?
- Fed Chair Jerome Powell is expected to announce a tapering plan that will end QE by June 2022. Investors will listen to the press conference to determine what this means for Fed fund rates.
- The US job report for October is expected to reveal if last month’s challenges in the normal seasonal hiring and layoff patterns are being ironed out or challenged anew.
- Global Manufacturing, Services and Composite PMIs will shed some light on the current supply constraints, pricing power and demand in a post-pandemic re-opening context.
- Markets will digest election results in Japan. Prime minister Fumio Kishida’s ruling LDP party lost some seats in the national parliamentary elections, while still maintaining a majority.
Investment convictions
Core scenario
- We continue to see upside and downside risks for risky assets.
- On one side, our central scenario is that the economic recovery will continue, far from being at the end of the cycle (GDP +4.3% in the US and in the euro zone in 2022, +5.5% in China). With loose financial conditions and cautious central banks, “TINA” will continue to prevail in the months to come and support equities.
- On the other side, durable inflationary pressures could lead to a more brutal tightening in financial conditions and trigger a premature contraction. While it is not our core scenario, one can imagine that this type of anticipation can lead to increased volatility and periods of correction in equity markets.
- We remain in a wait-and-see position on equities between bullish and bearish risks as volatility has increased since September.
- We believe that this context remains positive for ex-US equities, value stocks and assets (banks) and short duration on fixed income.
Risks
- Supply side constraints are numerous and will last longer than expected. Inventories remain low everywhere and bottlenecks are weighing on manufacturing output. Lack of commodities, semi-conductors, labour
- Inflationary pressures result from this: Energy prices in Europe for instance reach record high levels.
- The growth of corporates’ earnings could be impacted by a slowdown in economic growth or production stoppages forced by an extreme situation of supply tension.
Recent actions in the asset allocation strategy
Risky assets are in a balanced context with mixed economic news flow and upside surprises on inflation. After a marked slowdown, growth is now expected to pick up in both the US and China. The improvement in the epidemic situation should allow many economies to continue to reopen, while consumption should continue to be sustained by accumulated savings and a continued strong support of governments. While inflation should remain sticky, growth could surprise positively.
Cross asset strategy
We expect a more sideways phase with a possible increase in volatility before finding a clearer direction and a continuation of the expansion environment. We are neutral on equities after a very positive performance since the beginning of the year and considering the balance between bullish and bearish risks.
- We have exposure to assets related to the post-COVID rebound/recovery
Neutral equities, underweight bonds, preference for ex-US equities especially Emerging Markets through Latin America equities and China A onshore stocks.
Underweight government bonds, keeping a short duration. We focus on the source of the highest carry, i.e. emerging debt. We stay neutral US and European investment grade credit. We have a currency exposure to the NOK. - Positive stance on Small caps
- Positive stance on Global Banks
- Positive stance on long term growth thematics
Environmental solutions, digitization and healthcare are our strongest thematic convictions. Tech and Innovation themes, as well as Oncology and Biotech sectors reveal high growth potential.
