Multi-asset investments views – December 2019 The market rotation should continue

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Our key convictions :

  • We are tactically overweight equities as positive developments (Central banks easing, Trade war, Brexit, Banking Union) are releasing some pressures and should allow global growth to navigate a soft landing in 2020 in our view.
  • We maintain our cyclical tilt in our equity exposure as market pessimism on growth is still extreme.
  • We remain positive on Euro High Yield as a dovish Fed is supportive of carry positions
  • We remain constructive on Eurozone and US inflation breakevens as market pricing remains too pessimistic

Our positioning:

  • Tactically overweight equities
  • Cyclical tilt in our equity exposure
  • Positive Euro High Yield
  • Positive US and Eurozone inflation breakeven
  • Long equity call options delta hedged to protect the portfolios where possible

Our views

As we argued last month, positive developments are releasing some pressures and should allow global growth to navigate a soft landing in 2020 in our view. As things continue to go in the right direction, we consequently decided late last month to tactically upgrade our equity exposure to overweight.

Central banks continue to lean decidedly on the dovish side, leading de facto to a global synchronized policy easing. All in all, Fed, ECB, and BoJ balance sheets are likely to increase at a cumulative 1trn USD annual rate over the next 9 months, which should ease further financial conditions (cf. chart below) and extend the cycle by supporting global demand. In their quest to create “realised” inflation, the central banks are likely to carry on driving up risk asset prices. With the yield curve now back in positive territory, it reinforces our view that the risk of a recession remains moderate.

Of course, the trade war remains centre stage. The US continue to negotiate a ‘Phase 1 deal’ with China. The deal that fell through in May is now the benchmark in terms of the amount of tariffs to be rolled back in an initial agreement between the two sides. In our view, the impetus from the US Administration for a deal is now higher today than it was back in May as we enter the final year of the election cycle, increasing the probability of an agreement as time passes.

In Europe, the background noise seems to be pointing towards an increasingly benign backdrop. On the Brexit front we think the chances of a “no deal” exit are now very low. If the current Conservative government were to return with a workable majority, then the Brexit process would move forward faster, with PM Johnson’s deal likely to be passed soon after the election. A potential Labour-led coalition should shift the direction towards an even softer end-state. The banking union is also back on the agenda. Even if the actual impact, timeline and implementation remains uncertain, this is clearly a welcome change after the glacial pace of progress on EU Banking Union over the last several years  We will also keep an eye on the SPD leadership contest in Germany (30th of November) as it could push the fiscal debate in Germany onto the next leg. An increase in the minimum wage and dropping the commitment to a fiscal surplus are among the policies proposed by the contenders.

All this in a context of cautiously positioned investors as shown by the strong outflows from equity funds and ETFS over the last 18 months, and their heavy overweight defensives and underweight cyclicals. We believe that the current rotation from defensives/momentum into value/cyclicals will continue given valuation extremes and so we maintain our cyclical tilt in our equity exposure.

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