Last week in a nutshell
- Freshly confirmed in his post by President Biden, Fed chair Jerome Powell suggested that the term “transitory” with regard to inflation should be retired, opening the way to an accelerated tapering.
- The US job report showed a disappointing payroll employment (+210k vs. 550k expected), but contained strong elements as the unemployment rate fell by 0.4pt to 4.2% and household employment surged by +1.1M.
- At 55.4, the Markit Eurozone Composite PMI, indicated a solid rate of economic expansion. In the US, the Services PMI surprised on the upside, pointing to a strong fourth quarter in terms of growth.
- OPEC+ countries decided to stick with their planned production hike of 400Kb/d in January but maintaining optionality given the demand uncertainty linked to the evolution of the Omicron variant.
What’s next?
- The back and forth of Omicron headlines will continue until we get some solid scientific evidence. As a result, the holiday season started with the introduction of travel bans, albeit less drastic than in Q1 2020.
- The release of the US inflation rate YoY and MoM will give us some cues as to how the Federal Reserve Bank approaches its accelerated tapering. The FOMC will convene next week.
- In the US, the preliminary series of data published by the University of Michigan will give us insight into consumers expectations and business conditions amid the start of the holiday season.
- The euro zone will publish an estimate for its Q3 GDP growth rate while investors will still be trying to assess the potential impact of fresh restrictions reinstated over the new COVID-19 variant
Investment convictions
Core scenario
- We continue to see upside and downside risks for risky assets into year-end.
- 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.
- Beyond concerns about the Omicron variant, we believe that the medium-term context remains positive for ex-US equities, value stocks and assets (o/w/ financials) and short duration on fixed income.
Risks
- The coronavirus infections due to the Delta and Omicron variants and lower temperatures in the northern hemisphere underline the risk of a stop-and-go in economic restrictions. The mutating coronavirus should become endemic, as immunity is not steady and therefore needs a constant and full commitment to the vaccination campaign.
- 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 force.
- 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 deteriorating coronavirus news flow and mixed economic data showing on-going inflation pressures. After a marked slowdown, growth is now expected to pick up in both the US and China. Despite the most recent news on the Omicron variant, many economies are reopening for business. Consumption should continue to be sustained by accumulated savings and a strong support of governments. While inflation should remain sticky, growth could surprise positively whereas more stringent measures in Europe could leave a mark on the recovery this winter.
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. While staying neutral on equities after a very positive performance since the beginning of the year, the Omicron sell-off is creating buying opportunities. We keep considering the balance between bullish and bearish risks. While we keep our positive stance on financials, we recently reduced our exposure somewhat to protect our gains.
- 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
- Environmental solutions, digitization and healthcare are our strongest thematic convictions, revealing high growth potential.
