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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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.
© Societe Generale 2020
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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
1
We have a vaccine
Commodity-linked laggards
5
Green transition gaining momentum
3
Shift out of US Big Tech
2
2021, the year of Japanese equities
4
M&A revival
6
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
7
Steepening curves are the endgame
The combination of the three themes mentionned in our overview is clearly bullish for risk assets, particularly in the credit and equities space. We prefer to reduce the rate sensitivity of our MAP ahead of the anticipated rise in bond yields in western economies (thus adding a bit more weight on equities) and increase our exposure to inflation expectations.
With the economy in recovery mode and
infrastructure spending gaining momentum, commodities should continue to do reasonably well, we therefore prefer Commodities to EM fixed income or EM currency exposure.
From the current V-shaped recovery, economic momentum should only start to moderate from the second quarter of 2021, after which rising credit spreads should signal the end of the risk rally.
A substantial increase in equity exposure
We like the growth theme, but we strongly dislike any heavy portfolio concentration on a very few well-advertised US names. As US technology is set to become more volatile, we recommend diversifying into other growth assets available elsewhere.
We find attractiveness in Asian equities where cyclical acceleration will be a key feature in 2021.
We also find attractiveness in the Australian currency (AUD); Europe, where the Green deal offers multiyear structural growth; and mega trend themes including Asia 5G. On the contrarian side, increasing exposure to cyclical sectors in the corporate space also makes sense after their heavy underperformance (laggards).
Value in UK currency and equities… with a deal
Published inflation will stay subdued for a while, a consequence of rising unemployment and keeping alive too many zombie companies. However, the most recent policy shifts from both the Fed and the ECB are clearly aimed at raising inflation expectation (more information on this can be found on the Global Economic Outlook)
Gold, US inflation-protected bonds and steepeners can deliver well in this context. US real yields should thus remain artificially low, sending the expensive USD further down after a potential pause – but the rising Euro could dampen Euro area inflation expectations.
Markets will likely continue to be driven by three key themes until 1Q21: the pursuit of economic recovery via the strongest stimulus seen in decades, with fiscal policy taking the lead (helping final demand), a clear commitment by governments not to trigger early austerity (even in Germany), and a heavy monetisation of new sovereign and corporate issuance by central banks that will strongly distort credit risk. In a world with $14tn of negative yielding debt, portfolio managers with a growing savings pile to be invested are faced with the prospect of further momentum on risk assets and a possible imminent vaccine breakthrough on the one hand, and a potential resumption of volatility and profit-taking on any change in the risk outlook, on the other.
In this context, we retain some momentum in our allocation and we look for the best leverage to rising inflation expectations, rotation within the growth theme and significant portfolio protection.
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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.
© Societe Generale 2020
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