MAP - Building on Rotation, Asymmetry and Protection

MULTI ASSET Portfolio

Building on Rotation, Asymmetry and Protection

The second COVID wave has further strengthened a high rate of savings accumulation and high portfolio cash levels now ready to be invested in the economic recovery, notably equities at a time of negative real yields in the developed world. Currently, equity risk premia against sovereign bonds, but also against corporate credit, are very high, but the rollout of vaccines should lead to some normalisation. Market volatility should be a trigger for action in what we expect will be a year full of Rotations, Asymmetries and the continued need for Protection, in a greener environment for savings.

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This page contains financial analysis which reflects the opinion of the Cross-Asset Research department of Societe Generale, at the date of its publication. It does not necessarily reflect the views of the other departments of Societe Generale nor the official opinion of the Societe Generale group. This content has been prepared for use by institutional and professional investors and is not intended for retail investors. Investors should consider this report as only a single factor in making their investment decision.

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Japan is emerging as a new safe haven, geared to growth recovery, with an underowned, undervalued and under-leveraged equity market, as well as a fast-falling correlation with the yen.

Risk: New wave of COVID, slowing pace of reforms, much stronger JPY.

2021, the Year of Japanese Equities

The global green transition has been boosted over the past year by: i) the European Green Deal; ii) China recently announcing a target of carbon neutrality by 2060, with Japan and Korea aiming for 2050; and iii) Joe Biden’s election win in the US, with a pledge to re-join the Paris climate agreement next year

Risk: Slow implementation of green policies, delayed recovery burdening public finances.

Green transition gaining momentum

7 Keys Calls

An improved economic outlook in the medium term, thanks to the delivery of a COVID vaccine, could trigger some reallocation within the commodity complex.

Risk: Faltering recovery, early withdrawal of policy mix support.

Commodity-linked Laggards

Burdened by COVID and election uncertainty, M&A activity has been hit this year in the US, and to a lesser extent in Europe. A strong rebound in 2021 is certainly a possibility as the tough business environment this year may have created some unique opportunities for M&A and interest rates are hardly the problem

Risk: Unforeseen spike in equity volatility.

M&A Revival

Contrarian thinking. What if the Fed goes for a Maturity Extension Program (MEP)?

Out of the Box

(Click on each call to find out more)

Steepening curves are the endgame

Government bonds will likely come under pressure in 2021, as prospects of viable vaccines remove some clouds from the economic horizon, and while fiscal policy is set to take centre stage in most developed countries. Heavy supply, fuelled by massive budget deficits, and no rush into fiscal tightening, should drive bond yields higher. Given the very low level of yields, there is no longer a cushion to absorb a rise, not even a moderate one. With policy rates unlikely to change drastically in the US and the euro area, curve steepening is clearly the end game and our analysts maintain this view even though it has already begun on the US curve. They see further steepening potential on all maturities but mainly on the 2s10s segment. Desynchronisation between China and western economies leads them to take some exposure to Chinese local-currency bonds, which provide attractive real yield and diversification benefits. Indeed, Chinese bond yields have already increased, as China recovered earlier from the first COVID-19 wave and has not suffered a second wave.

A substantial increase in equity exposure

The medium to longer-term prospects are getting brighter, thanks to the prospect of imminent vaccine rollouts. Such a backdrop, combined with what looks set to be a long-term accommodative monetary policy and fiscal policy gaining momentum, should provide support to a rotation into more cyclical equity market segments, which have been lagging so far. However, in light of the risks on the credit side, our analysts will look for strong balance sheets. After showing strong resilience to the economic shock and outperforming this year, our analysts expect US Big Tech to come under more pressure in their V-shaped or swoosh-shaped recovery scenario. Japan is back on investors’ radar screens, with institutional flows slowly building up again. Japan is emerging as a new safe haven, geared to growth recovery, with an under-owned, undervalued, under-leveraged equity market, and a fast-falling correlation with the yen. The global green transition has received a boost in the past year. This theme will continue to gather momentum and provide opportunities in equities in all regions.

Value in UK currency and equities… with a deal

After deteriorating, the newsflow on an EU/UK Brexit deal has improved again in recent weeks. Although it is too early to claim there will be a deal at the time of writing, sterling and UK equities are attractive in terms of valuation. The UK currency remains undervalued in trade-weighted terms, significantly undermined by the uncertainties surrounding Brexit since mid-2016. An exit with a deal, even a light deal, would at least keep a trade framework in place with the UK’s main trading partner. That would allay the worst fears for the economy and prevent the Bank of England from taking rates into negative territory, providing support for the GBP. UK equities are cheap according to our analyst's equity risk premium tool and UK equity funds have suffered from accelerating outflows since the Brexit referendum in 2016. Even by taking into account the increased popularity of ETF funds, this has not altered the overall picture. In the event of a Brexit deal being agreed to in extremis, our analysts would expect net inflows to return in force.

Overview

After their strong resilience to the economic shock this year and outperformance, our analysts expect US Big Tech – and more specifically New Tech – to come under more pressure in our V-shaped or swoosh-shaped recovery scenarios.

Risk: deteriorating sentiment triggering a flight to the safe-haven US equity market.

Shift out of US Big Tech

We have a vaccine

Commodity-linked laggards

Green transition gaining momentum

Shift out of US Big Tech

2021, the year of Japanese equities

M&A revival

Out of the box

Despite the current second COVID wave in the western world, the medium-term economic outlook is now brighter thanks to the emergence of multiple viable vaccines.

Risks: Slow pace of vaccination, reluctance to be vaccinated by a proportion of the population, early policy mix tightening.

We have a vaccine

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