LAST WEEK IN A NUTSHELL
- We learnt that the US consumer is in good shape as Retail Sales rebounded in August with a stronger-than-expected 0.7% increase despite constraints due to the delta variant.
- Several corporate surveys confirmed an improvement in September in the US business sector, e.g. NFIB Small Business, Empire Manufacturing, Philadelphia Fed Business Outlook.
- In various places, from the UK to Canada via the euro zone, August consumer price inflation surged to the highest level in a decade. US inflation data was lower than expected but still high, at 5.3% YoY.
- The US, UK and Australia stroke a new security partnership called AUKUS. The programme is a direct response to China’s growing power in the Pacific. We also learnt that President Xi declined a personal meeting with US President Biden.
- The Fed’s decision on Wednesday will be the main highlight of several central bank meetings, but the BoJ, BoE, SNB and Riksbank will also be in focus, alongside a number of Emerging Markets central banks (Turkey, South Africa and Brazil).
- One week after the elections in Norway, political events will be scrutinised, with the result of the Duma elections in Russia, Canada’s election on Monday, and the German election on Sunday.
- In China, Evergrande faces several obligations: loan interest payments are due this Monday and bond interest payments are due on Thursday.
- On the data side, the September flash PMIs will shed further light on the state of the global economy.
- Core scenario
- In our central scenario we consider that growth is impacted by temporary factors and we maintain the view that we are in the middle of the reopening, not of the economic recovery cycle. Reflation plays have a more attractive risk-reward and should benefit from the reduction of risks perception. The expected gradual rise in real rates is the key trigger for a possible outperformance of the value part of the market.
- We believe that this context remains positive for ex-US equities, value stocks and assets (banks) and should lead to higher yields.
- In the US, growth and inflation data should stay at elevated levels and the Fed is expected to announce a tapering by the end of the year.
- In Europe, monetary dynamics are still positive and should stay accommodative. Fiscal dynamic should remain positive with the roll out of the NGEU and the upcoming election in Germany which could help the EU risk premium decline.
- In emerging markets, we assume that Latin America should further benefit from the catch up in the reopening trade. On the long run, China should benefit from growing domestic demand.
- Market views
- Industrial activity is levelling off, mostly constrained by supply chains bottlenecks.
- Latest macroeconomic data publications were more mixed and Q3 was globally weaker than expected, in particularly in China and in the US.
- We are sticking to our positioning that favours non-US equities and we keep hedges against higher yields and inflation. We are buying European and US banks, US small and mid-caps, and have an exposure to Emerging countries with a bias through Latin American equities and China A onshore stocks.
- Simultaneously, our core portfolio keeps the most resilient themes and countries.
- The delta variant is spreading particularly threatening countries and regions that are less well vaccinated. This did not stop the reopening of the economies in developed countries. With fall arriving, this reopening should go better than last year.
- Fed and ECB tapering will be another focus in the coming weeks. Inflation is still widely seen as temporary. This should allow central banks to control their communication and avoid any policy mistake.
- Regulatory tightening in China has triggered a correction in July / August on Chinese stocks and on stocks exposed to China. Policy easing should help find some support and allow some catch up in Q4.
RECENT ACTIONS IN THE ASSET ALLOCATION STRATEGY
Q3 mixed economic data have led to greater caution in investments (e.g. bonds, equity styles). We maintain the view that we are in the middle of the reopening, not of the economic recovery cycle. Three risks are now closely monitored by financial markets: Delta variant spreading, Fed and ECB “tapering” announcements and regulatory tightening in China. Reflation plays should benefit from the bottoming out in bond yields and the reduction of risks perception. In this context, we recently took profit on our Consumer Staples positions. We remain neutral equities, with a preference for ex-US equities. And we are keeping some equity derivative protections and hedges against higher yields and inflation.
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 reflationary environment. We are neutral equities and underweight bonds.
On the equity side, the impact of the pandemic is set to diminish and, as countries emerge from the crisis, their economies should rebound and rebuild. The COVID crisis may have little effect on the long-term growth potential of economies and is even pushing for accelerated productivity gains. Rebuilding after the pandemic implies that growth will perhaps be different, with less globalisation and more green and equitable growth, but it could also mean margin pressure for some companies. Hence our strategy is geared towards reflation trades and long-term winning sectors. Our multi-asset investments can be summarized as follows:
- 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
Current context is supportive for ongoing rotation towards stocks geared to the recovery and a steepening of the yield curve. We have a position on small and mid-caps in the US and Latin America.
- Positive stance on Global Banks
Banks in the euro zone still present a steep discount to their long term average and we are adding EMU banks. We also keep an overweight stance on US banks, which could benefit from the yield curve steepening: We expect US 10Y yields to hit 1.75% by the end of this year.
- Positive stance on long term growth thematics
Inclusion of secular megatrends to profit from long-term sustainable growth. The pandemic revealed that they are helpful in building a resilient portfolio. 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.