While the coronavirus is still spreading and the vaccine rollout is more challenging than anticipated, the latest manufacturing PMI are resisting well and improving. As markets move towards a mechanic rebound, data hint at a continuation of the reflation trade in H1 2021. Indeed, the prospect of a return to global growth after the economic hit from the Covid-19 pandemic seems within reach. The loose central bank monetary policies will contribute and the hopes of more stimulus spending under President-elect Joe Biden should be fulfilled. Over the short term, markets may suffer from disappointments due to the slowness of vaccination, at least in continental Europe.
In our global allocation, our thorough research aims at identifying strong convictions and market drivers. They currently include, among others, the reflation trades.
The current context, which combines a few factors that are conducive to a return to global growth, still has room to grow. Economic growth is broadening and accelerating, as witnessed by the Q4 global PMI.
As lockdowns are back in Europe to various degrees and at various stages, the recovery might go from a V-shaped to a W-shaped one with a less dynamic rebound in early-2021 but, overall, the state of the global economy is improving. In the US, momentum is also on a virtuous trend. A major political hurdle was cleared early January with the election of two Democratic Senators in the southern State of Georgia, a long-term Republican state, which held run-off elections. President-elect Joe Biden will have a unified Congress to back his program and the newly-appointed White House administration, giving him more room for manoeuver, also in “green(er)” projects, prominent elements in the Biden platform.
The recent events provide a context that is highly supportive of a continuation of the rotation towards value stocks, rising rates and commodity prices. Central banks offer strong forward guidance. Real interest rates are still in negative territory and financial conditions are looser than ever before and for longer. Also, governments are expected to provide further fiscal policy easing this year. In addition, the performance gap between growth and value is historically high.
In our strategy, this translates into a preference for equities vs bonds. Within equities, we have a positive assessment for European and Emerging markets. In terms of capitalizations, we have a preference for US and UK small and mid-caps over large capitalizations. We are also overweight global banks. In the fixed income universe, the conviction that the reflation trade has further to go translates into underweight government bonds while we stay long emerging market debt (local currency) and anticipate a steepening of the yield curve. In terms of currency, opportunities are offered by those contributing to a commodity proxy. The first half of the year will benefit from the mechanic rebound. Whether this sustains into the second half of the year remains to be seen. The timing will not be easy. Financial markets shall look above and beyond the short-term disappointments linked to the virus and its vaccine. Every correction represents an opportunity to buy, assuming that the vaccine works in the end.
The Covid-19 crisis will have long lasting effects on companies and countries. Households, corporations, governments, every entity has had to adapt to deal with the impact of a pandemic. Consumption patterns and social habits have changed, so has the distribution of financial help, social benefits and paycheck protection programs. Nevertheless, the gap between relative “winners” and “losers” has widened.
In Europe, for instance, there is a growth gap between countries depending on:
- the structural vulnerability of some countries to such a sanitary crisis to begin with (Spain, Italy, Portugal and Greece) vs. Germany or the Netherlands
- their ability to navigate their way out of the crisis - and Germany, again, has stood out.
Hence, there is a need to identify and stay with the most resilient countries but also sectors, post-Covid 19.
In terms of sectors, that includes global technology, the greatest beneficiary of the current crisis, on-line distribution and health care. In terms of countries, that includes those that will also be able to afford the increased government spending needed. Germany will benefit from some fiscal leeway. The structurally rising government expenditures will make a dent into public finances but also create opportunities for savvy investors.
The efforts towards sustainability will benefit companies on the receiving end of the “Green Deal” in Europe. We therefore invest in climate change and circular economy as part of our long-term thematic strategy.
Risks and opportunities
At first sight, the cure to a global pandemic is finding a vaccine. But upon closer look, it does not stop there. The mass production, stocking, distribution and administration of the vaccine is an untried challenge and the rollout, although long-awaited, is slower than anticipated. Hence, governments have found themselves in a race against time between the vaccine rollout and the acceleration of the epidemic in Europe, which is going through another wave. The UK, for instance, entered their third national lockdown, right after New Year´s Eve. There is also the threat of new virus strains, which could delay herd immunity.
We keep our overweight equities but partially hedge the European equities exposure. Over the short term, markets could be weakened by the lack of certainty that covid-19 is once and for all behind us. While some sentiment indicators seem to point out excessive optimism, we believe there is still room for further positive inflow in equities (particularly in Europe).
Our current multi-asset strategy
The current context of a starting recovery year is leading to a positive assessment for equities vs bonds. Our portfolio is geared towards several reflation trades as we watch economy growth broadening and accelerating. We have a positive view on European and Emerging equities. While we are neutral US, we are overweight US smaller and mid capitalizations, same for UK small caps. To benefit from the rotation in favour of value and cyclical stocks, we choose an overweight global banks. In our fixed income bucket, we are underweight low-yielding government bonds and underweight duration but overweight peripheral European government bonds.
A part of the strategy is dedicated to longer-term core convictions. They include sectors impacted by the need and the development of sustainability, technology, health care as we redefine our consumption and habits but also specific countries with long-term growth prospects and resilient equity markets such as China (via domestic shares) and Germany (via the DAX).
In terms of hedge and to protect against disappointment as financial markets stay vulnerable to the uncertainty surrounding the aftermath of the pandemic, we keep protective derivative strategies, gold and JPY.