Overview
MULTI ASSET Portfolio
Of growth laggards and inflation protection
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, a clear commitment by governments not to trigger early austerity, 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.
Leverage
to higher
inflation expectations
Shifting out of US growth
Heavy political
interference
Out of the box
Leverage to higher
inflation expectations
Diversification into TIPS and Gold provides protection against a potential rise in inflation expectations.
Risks: L-shaped recovery,
COVID third wave.
OUR 7 KEY CALLS
3
2
1
Starting to gear to widening credit spreads in 2021
4
Europe: now comes the execution of the plan
5
Attractive
laggards
6
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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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Keep some momentum, expect the market to
peak in 1Q or 2Q21
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.
Our best ideas for portfolio protection
Rising long bond yields is a key risk, as growth momentum continues despite the second Covid
wave, especially in the case of a vaccine breakthrough.
We started to raise the weight of credit substantially in mid-April. We now flag that US high yield offers a new risk asymmetry.
A surprise Trump reelection could reinforce the trade war, so shorting our “Trump –” basket could be very effective portfolio protection.
Pick the right assets to leverage to rising inflation expectations
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.
Diversify your exposure out of US Technology
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).
Shifting out of US growth
US growth assets have been favoured so far in the current uncertain context and low interest rate environment.
Risk: deteriorating sentiment triggering a flight to the safe-haven US equity market.
THOUGHTS FROM OUR EXPERTS
Alain BOKOBZA, Head of Global Asset Allocation Strategy
Heavy political interference
The US November election, the Brexit deadline, a new Prime Minister in Japan could cause considerable market turbulence.
Risk: US election outcome in line with current polls, breaking of the deadlock in Brexit negotiations, no change in Japan’s policy mix.
Starting to gear to widening credit spreads in 2021
Credit has benefited from the strong policy support from major central banks and governments since March.
Risk: the economic recovery is stronger than expected and, coupled with liquidity support, prevents massive defaults.
Europe: now comes the execution of the plan
The heads of European governments approved the European Commission’s €750bn Recovery Fund, a major game changer in our view.
Risk: slow implementation of the spending plan and lack of
structural reforms.
Attractive laggards
The bear market rally has been exceptional in speed and nature, in line with the policy mix response. We find attractive opportunities within laggards.
Risk: negative feedback loop
between equities and bonds,
impacting financial conditions.
Out of the Box
Contrarian thinking
Stronger-than-expected
impact of a COVID vaccine
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7
OVERVIEW
MAIN IDEAS
MULTI ASSET Portfolio
Of growth laggards and inflation protection
#contentwithimpact
Contact
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
Cookies Policy
Legal Information
By continuing to use our website, you are accepting our use of cookies. The cookies we use are "analytical" cookies. They allow us to recognise and count the number of visitors and to see how visitors move around the site when they are using it. To find out more or to change your cookie preferences, please refer to our cookies policy.
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Keep some momentum, expect the market to peak in 1Q or 2Q21
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.
Diversify your exposure out of US Technology
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).
Pick the right assets to leverage to rising inflation expectations
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.
Our best ideas for portfolio protection
Rising long bond yields is a key risk, as growth momentum continues despite the second Covid wave, especially in the case of a vaccine breakthrough.
We started to raise the weight of credit substantially in mid-April. We now flag that US high yield offers a new risk asymmetry
We prefer to short sterling versus the yen to protect against risk of faltering Brexit negotiations
A surprise Trump reelection could reinforce the trade war, so shorting our “Trump –” basket could be very effective portfolio protection
Main IDEAS
