Coffee Break

Investment Convictions

Core scenario

• The Russian military invasion of Ukraine might lead to significant tensions and alter the market outlook over the medium term. For now, a scenario of above-potential economic growth remains but the achievable numbers’ range may be lower in the short term.
• The latest messages sent by the Fed (interest rate lift off and balance sheet run off) and the steepness of the path towards monetary tightening will also condition performance in 2022. On a medium term, liquidity reduction is a turning point.
• In the US, elevated inflation and rather strong growth, while expected to fade in 2022, should drive interest rates and bond yields higher.
• In Europe, we might continue to live with negative real interest rates for some time.

Risks

• The Russia-Ukraine war will push energy prices further and continue weighing on investor sentiment while sanctions usually end up hurting both sanctioned and sanctioning parties.
• A brutal, faster-than-anticipated rate tightening in the US - if inflationary pressures increase and/or persist - could jeopardize the recovery.
• The COVID-19 and its variants underline the risk of a stop-and-go in economic restrictions.
• Also, supply side constraints are numerous and counting due to the Russian conflict. They will last longer than expected and extreme supply tension could impact economic and corporate earnings growth.

Recent actions in the asset allocation strategy

Central banks’ path towards rate normalisation is being challenged by the Russia-Ukraine war as high energy prices usually go hand in hand with lower economic growth or stagflation. The Fed will likely not change its stance in the short term but the ECB may mark a pause. Overall, central banks’ credibility in their forward guidance and the evolution of the growth/inflation context will remain key. The lack of clarity in markets’ direction had already led us to trim equity exposure towards neutral. Depending on how far energy prices go, inflation should remain uncomfortably elevated and weigh on growth. We have no choice but to deal with uncertainty, especially in a context of challenging geopolitics. We know from the past that armed conflicts do not have a lasting impact on markets, except when they lead to an energy crisis.

Cross asset strategy

The shifts in economic and inflationary regimes will call for a dynamic equity allocation. We still expect inflation to peak in Q1 2022 as bottlenecks start to ease. 

1. Our most recent strategy adjustments to the shorter investment horizon and increasing volatility include derivatives strategies to protect our exposure to equities. We have an overall neutral positioning on equities, but with a recent adjustment:
   • via a partial profit taking of our exposure to UK equities and
   • via a more balanced exposure between US and European equities, which are more vulnerable to the current conflict.
   We also remain overweight Emerging market equities, due to attractive valuation:
   • via China (rebound of credit impulse) and
   • via Latin America (support from rising commodity prices)
2. In our fixed income allocation: We keep a short duration (as the rise in bond yields is not over in our view) and diversification, via emerging debt and inflation-linked bonds
3. In our long-term thematics and trends allocation: Our convictions spread across Health Care, Demographic Evolution and Consumption, Climate Change and Innovation. In the current context, we privilege the former, but setbacks on the latter thematics could provide attractive entry points.
4. In our currency allocation strategy we recently added JPY, CHF and USD.