Last week in a nutshell
- Fully in line with consensus expectations, the annual US inflation rate accelerated to 6.8% in November.
- Amid the start of the holiday season, preliminary data published by the University of Michigan reveal that US consumer sentiment rose in early December, even more than forecasted.
- The approval rating of the US President Joe Biden has suffered. As we enter a midterm election year, the latest survey revealed that only 37% of Americans approve his economic record and 56% disapprove.
- The euro zone economy grew by 2.2% QoQ during Q3 2021, matching initial estimates. Household consumption was the main driver.
What’s next?
- We enter a seriously busy week for markets as 8 of the G20 central banks decide on monetary policy. Investors expect the Federal Reserve to accelerate the tapering of their asset purchases.
- In Europe, the European Central Bank and the Bank of England will also meet. The former will publish its economic projections and the latter is expected to finally raise interest rates next year.
- The release of the December flash PMI’s will shed some light on the initial impact of the latest Omicron variant. Details on delivery times would give hints on improving shipping/bottlenecks.
- During the EU leaders’ summit, COVID-19 and the deterioration in relations with Russia will be discussed. Russia recently rushed military forces near Ukraine and amped up aggressive rhetoric.
Investment convictions
Core scenario
- We continue to see upside and downside risks for risky assets into year-end, but we are more constructive for 2022.
- Our central scenario is that the economic recovery will continue, far from being at the end of the cycle (GDP +3.9% in the US and +4.3% in the euro zone in 2022, +4.9% in China). With cautious central banks, “TINA” will continue to prevail in the months to come and support equities.
- We have to navigate between bullish and bearish risks on equities as volatility has increased and year-end liquidity will be scarce.
- Beyond concerns about the Omicron variant, we believe that the medium-term context remains positive for equities, value stocks and assets and short duration on fixed income.
Risks
- First and foremost, the coronavirus infections, due to the Delta and more recently Omicron variants, and lower temperatures in the northern hemisphere underline the risk of a stop-and-go in economic restrictions.
- Second, supply side constraints are numerous and will last longer than expected. A situation of extreme supply tension could also eventually impact not only economic growth but also corporate earnings’ growth.
- Third, a brutal, faster-than-anticipated rate tightening in US financial conditions - if inflationary pressures increase and/or persist - could jeopardize the recovery.
Recent actions in the asset allocation strategy
Strong economic performance should continue into 2022, with growth of around 4% both in the United States and in the euro zone. We expect supply and demand will gradually rebalance in an above-potential growth context in major developed economies. As strong demand faces pandemic-related supply bottlenecks, tensions arise and are leading to higher prices. Hence, inflation should remain uncomfortably elevated, at least during the winter months. We expect the beginning of a Fed rate hike cycle to be a very delicate time, during which we prefer keeping a short duration. For equity markets, the context of an expected initial yield curve steepening combined with above-potential growth leads us to begin 2022 with a constructive stance on Equities, mainly via the euro zone and Emerging markets.
Cross asset strategy
The shifts in economic and inflationary regimes will call for a dynamic equity allocation. As we prepare for Q1 2022, inflation should peak and bottlenecks start to ease. We will focus on value and risky assets until growth shows resilience and inflation decelerates. We recently increased our exposure to equities as the Omicron sell-off created buying opportunities.
- We have exposure to assets related to the post-COVID rebound/recovery
Overweight equities, underweight bonds. Within equities, preference for European and Emerging Markets through China-A onshore stocks, then Japanese and US equities.
Underweight government bonds, keeping a short duration. We focus on the source of the highest carry, i.e. emerging debt. We stay neutral European investment grade credit, we downgrade US investment grade. We have a currency exposure to the NOK. - Positive stance on financials, materials and energy – assuming that Q1 2022 sees inflation peaking and bottlenecks easing.
- In our core long-term thematics: tech&innovation, healthcare and climate, as they reveal high growth potential.
