Last week in a nutshell
- The news flow at the end of last week on a new variant of the coronavirus has pushed commodity prices lower and inflation expectations down. Stocks fell sharply.
- Jerome Powell was officially nominated by US President Biden for his second term as Fed chair while Governor Lael Brainard will serve as vice chairwoman. The Senate is expected to confirm those nominations.
- The Fed’s November minutes showed concern about inflation and a willingness to tighten policy “sooner than participants currently anticipated”.
- In Germany, the Social Democrats, the Greens and the Free Democrats agreed to a new government. Chancellor Merkel will be replaced by Olaf Scholz in the week starting December 6th.
What’s next?
- Heading into December, there’s still an incredibly eventful period ahead as investors will evaluate the potential impact of fresh restrictions, including travel bans, which were reinstated over a new COVID-19 variant.
- The US job report will be released. Past weekly jobless claims have plunged, giving us cues on the tightening labour market. Companies are struggling to retain and expand their workforces.
- The growth / inflation debate will continue as global Manufacturing and Service PMI will shed some light on the activity and the euro zone will release flash CPI estimates for November.
- US Fed Chair Powell will testify before congressional committees while, at the same time, the OPEC+ countries will hold their meeting deciding on an output increase scheduled for January.
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 Nu variant, we believe that the medium-term context remains positive for ex-US equities, value stocks and assets (banks) and short duration on fixed income.
Risks
- The coronavirus infections due to the Delta and Nu 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. Outside Europe, 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 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.
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, the latter gaining the upper hand in recent days.
- 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.
