Highlights of asset allocation – Long Covid

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This is an extract from our monthly asset allocation – Long Covid

Macro US – Headwinds

It has become clear that supply chain bottlenecks and inflation will last longer than expected. We expect core inflation (as measured by the Personal Consumption Expenditure Index) to rise for another year, to around 4.4%, before falling back to 2% in 2023.

To cope with rising prices, households are likely to tap into some of the savings they accumulated during the pandemic.

The US Federal Reserve can be expected to raise its projections for future interest rates – in the ‘dot plot’ – in December and prepare the market so that this does not come as a surprise.

Macro Europe – A positive outlook, but vulnerable

Europe is more vulnerable to disruptions from the post-containment reopening than the United States. Rising prices for natural gas are more damaging as it is a much more important source of energy for the region and the manufacturing industry accounts for a larger share of the economy, especially in Germany.

However, the outlook remains positive. Consumer confidence has held up despite lingering concerns over Covid and rising prices. So far, soaring energy prices have not derailed spending. Supply and energy problems are expected to ease, EU support funds will flow, labor market dynamics remain favorable, excess savings are high and travel rules relaxed should stimulate tourism.

For the first time in a long time, core inflation is now hovering around the ECB’s target. Our calculation of seasonally adjusted monthly changes in the components of core inflation, however, shows cooling pressures. We expect core inflation to fall below the 2% target by the end of next year. Upside risks include increases in the minimum wage, offset by easing tensions in the supply chain.

Macro China – Beijing to the rescue?

China has recently faced many challenges: real estate developers in debt, outbreaks of Covid infection, flooding and now power shortages. However, the government’s efforts to boost supply and curb demand have led to a sharp drop in coal prices. They could decline further in the coming weeks as increased imports add to coal and gas supplies.

As Chinese growth slows, many observers expect further government action to stimulate a rebound by increasing credit. The credit boost has often resulted in economic growth in China for around six months.

Markets and central banks

Our medium-term outlook is optimistic: solid growth, moderate inflationary pressures and an accommodating monetary policy. In the near term, we are concerned that confidence in the growth outlook may erode, especially given the weakness of China. Stagflation is one of the main concerns for investors (see Annex 2).

As the markets have now assimilated the inflation news and concerns about real estate developers in China have faded, earnings are the focus. Despite concerns about pressure on margins, published results were surprisingly strong. As supply and labor shortages weighed on the minds of CEOs, the ability of many companies to pass price increases on helped maintain margins.

At the same time, yields on 10-year US Treasuries rose further, driven almost entirely by inflation expectations as well as rising core inflation in the United States. The market sees inflation rising higher for longer as Covid disruptions persist, energy prices rise and rent inflation is set to accelerate in the United States.

Market expectations for what central banks will deliver have changed. The US Federal Reserve is now expected to hike interest rates more frequently – twice by the end of 2022. Expectations about the ECB’s policy are also shifting in a market increasingly skeptical of its inflation rhetoric ” temporary “.
We expect the ECB to try to push back on this view by stressing that it expects rates to stay at their current levels or below until at least the end of 2022. It will be important that she points out that rate hikes are unlikely in 2022. and 2023. Otherwise, the markets may assume that rates will rise even further down the road.

Asset allocation

  • We are long actions: We believe the medium-term outlook is good thanks to a strong economy and strong earnings growth. Equities remain attractive relative to bonds despite high multiples.
  • • We are a long time we and Japanese actions. Within the Eurozone, we are overweight EMU small caps, which should benefit from a high beta and more attractive valuation relative to large caps. We have reduced our overweighting of European banks. Bank results should benefit from the expected rise in long rates. Earnings revisions and their relative valuations are also favorable.
  • We rotated our overweight in emerging market equities to American equities given the many challenges facing emerging market equities, particularly in China.
  • We are overweight US small caps versus US equities. A revival in economic momentum, the return of reflation trading or a steeper yield curve could all be drivers of small caps that are already attractively valued.
  • Being underweight in duration is a strategic position given the favorable economic outlook, the current low level of yields and the outlook for monetary policy normalization.
  • We closed our short position on EMU sovereign debt as returns approached our target.

All opinions expressed herein are those of the author as of the date of publication, are based on available information, and are subject to change without notice. Individual portfolio management teams may have different opinions and make different investment decisions for different clients. The opinions expressed in this podcast do not constitute investment advice in any way.

The value of investments and the income from them may go down as well as up and investors may not get their original stake back. Past performance is no guarantee of future returns.

Investment in emerging markets, or in specialized or small sectors is likely to be subject to above average volatility due to a high degree of concentration, greater uncertainty as less information is available. available, there is less liquidity or due to greater sensitivity to changes in market conditions (social, political and economic conditions).

Some emerging markets offer less security than the majority of international developed markets. For this reason, portfolio transaction, liquidation and custody services on behalf of funds invested in emerging markets may involve greater risk.



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