Last week in a nutshell
- As expected, the US House voted to raise the debt ceiling, following the Senate decision. This next level gives some breathing space until early-December.
- Headline US CPI rose slightly, to 5.4%, in September. Higher food and rent accounted for more than half of the 0.4% monthly increase.
- The minutes of the September FOMC confirmed the idea of a turbo-charged taper, ending additional bond purchases by mid-2022.
- Chile’s central bank surprised investors by hiking rates by 125bps to 2.75%. The decision was taken on the back of rising inflation risks, especially the two-year expectations, and macro imbalances.
What’s next?
- Markets will digest the US retail sales for September. Household consumption is important to focus on as it represents roughly two thirds of the US GDP.
- EU leaders are due to meet for the European Council in Brussels. While the ongoing energy crunch is set to take the centre stage, digital policies also remain on top of the agenda.
- Argentina will hold its mid-term elections.
- Germany will release its Ifo Business Climate indicator after 3 months of decline in a row.
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 negative economic news flow and positive surprises on inflation which raised fears of stagflation. 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 continue to surprise on the upside, growth could also surprise us 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.
