Last week in a nutshell
- The Fed is officially starting tapering in November, reducing its asset purchases by $15bn per month. This implies that the US central bank’s balance sheet will increase by the middle of next year.
- A strong job report for October (adding 531k new jobs, unemployment falling to 4.6%) provide further confirmation of the underlying strength of the recovery as the US passes the peak of the delta wave.
- Global Manufacturing and Services PMIs revealed the persistence of supply chain bottlenecks and logistical problems in manufacturing and a boost in the service industry as economies re-open.
- The Bank of England wants to see how the job market copes with the end of the furlough scheme before possibly changing its rate. Market participants expected a hike and the GBP weakened on the news.
What’s next?
- The week ahead is somewhat quieter after the recent busy macro calendar. Inflation will be back in focus as the US and China will publish a series of inflation-related data, including PPI and CPI.
- In Europe, the ZEW economic sentiment index will shed some light on the level of optimism that analysts have about the expected economic developments over the short term as virus cases are increasing.
- In the US, the preliminary consumer sentiment index will give an indication on the mood before the holiday shopping season. With a receding delta wave and an improving labour market, investors expect an uptick here.
- Investors will keep an eye out for any news on the Federal Reserve appointments, with President Biden saying they would be announced “fairly quickly”. Chair Powell appears likely to be nominated for a second term.
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 upside surprises on inflation. 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 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.
