In September, the investing environment was poor, with "stagflation" the word on everyone’s lips around the financial markets. Supply-side constraints (labour and product-line shortages) pushed inflation higher. However, growth should pick up in the coming months due to US resilience, the new European plan and some new Chinese easing measures. In this unbalanced context, we remain in a wait-and see position on equities and cautious on bonds.

Asset Allocation

More challenges but some hopes

The current economic environment sees a clash of conflicting forces. On the one hand, the reopening around the world implies a need for products and services in a context of low inventories. On the other, production forces are struggling to meet this demand, as some production sites lack the manpower or ways to route these products. These issues explain the current spike of inflation, disquieting investors, as its transitory character is less certain. Higher energy prices are also contributing to this mood. Companies’ guidance, too, will be scrutinized during the earnings season.

Nevertheless, some positive signs exist. The pandemic is retreating, allowing more reopening. Consumption should stay sound, the USA is less affected by energy spikes, Europe is more dedicated to development and China should be more proactive in their attempts to reach the common prosperity goal. Growth could, then, surprise positively. In this context, US nominal yields, notably real yields, have been climbing and should continue to a degree to do so. It should help the rest of world vs. the US and the value factor to perform in the equity world.

 

Risks to the scenario

Inflationary pressures represent a risk to our central thinking. By the way, the Anglo-Saxon central banks, Norway too - less confident about inflation - have already implemented some restrictions. A mix of monetary tightening and durable supply bottlenecks may lead to a brutal decrease in the economic and financial conditions and trigger a premature recession that would obviously be dangerous for risky assets.

Our credo

We continue to see upside and downside risks for risky assets. We believe that the economic recovery will continue over the next few months, with GDP growth coming in next year above 4%. The central banks, the ECB and the BOJ at least, should stay patient. The acronym “TINA” should stay in vogue in the financial markets. However, we remain alert to the inflation component, which could trigger less favourable financial conditions. We remain alert, too, to the societal changes, green and equitable, that will have a durable impact on markets, moving investors’ choices and company margins, depending on their abilities to adjust.

Our current multi-asset strategy

We shall be neutral equities over the coming weeks, but ready to profit from opportunities, should a correction occur. On the fixed-income side, we remain underweight government bonds, which might have bottomed out this summer. We are long breakeven yields, notably in Europe, as the central bank is likely to react very slowly to the struggle vs inflation. This context should benefit the “value” sector (non-US equities - European and Japanese, notably). We are also hedging the inflation risk with banks and “commodity-like” strategies. Otherwise, we remain positive on some emerging markets (Chinese A-shares, which could benefit from some policy-easing) and Latin America stocks (which could benefit from the reopening and the small-caps sector.

Asset Allocation