Last week in a nutshell
- Delivery bottlenecks and price increases, triggered a surge in global inflation, Chinese and US Consumer and Producer price indexes showed. Whether it is the peak remains debatable.
- In the US, the consumer sentiment index compiled by the University of Michigan hit a 10Y low in a context of receding COVID-19 cases and strengthening labour market but rising prices.
- In Europe, the ZEW economic sentiment index increased by 4.9 points to 25.9, rather undisturbed by the rising COVID-19 tally in Europe that did not yet knock investor sentiment in the current wave.
- The UK government threatened to suspend parts of the arrangements meant to steer clear from a hard border with Ireland. The EU commission started considering retaliatory measures.
What’s next?
- Chinese leader Xi Jinping and U.S. President Joe Biden are scheduled to hold a virtual summit. Tensions over trade, human rights and military activities are on the agenda.
- China will release its October data on industrial production and retail sales. The zero-COVID-19 policy, power rationing as well as environmental curbs on several industries have recently hit output.
- Markets are expecting the White House to announce its choice for Federal Reserve chair. The incumbent, Jerome Powell, and Fed governor Lael Brainard appear as frontrunners.
- Japan will release its preliminary Q3 GDP growth rate. Investors expect a slightly negative number as consumption and output were hindered by a virus resurgence and supply bottlenecks.
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 have to navigate between bullish and bearish risks on equities 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 high inflation releases. 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 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.
