Highlights of BNP Paribas Asset Management’s asset allocation – Long Covid

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Below, the main highlights of the asset allocation report by Denis Panel, Head of MAQS and Daniel Morris, Chief Market Strategist at BNP Paribas Asset Management, are presented.

“We believe confidence in the growth outlook could weaken in the near term, especially given recent weakness in China, ‘stagflation risk’ and a worry-dominated earnings season. of ‘squeeze the margins’. Longer term, we continue to favor equities over government bonds as growth strengthens, inflationary pressures abate and central bank support only slowly wanes. ” Denis Panel, Head of MAQS.

Highlights include:

Macro Europe – A positive outlook, but vulnerable

Europe is more vulnerable to disruptions from the post-containment reopening than the United States. The increase in natural gas prices is 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 be disbursed, labor market dynamics remain favorable, excess savings are high and travel rules relaxed. should boost 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 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 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 led to economic growth in China for around six months.

Markets and central banks

Our medium-term outlook is optimistic: solid growth, moderate inflationary pressures and accommodating monetary policy. In the short 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.

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 labor supply and shortages weighed on the minds of CEOs, the ability of many companies to pass price increases on has 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 the 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 opinion by emphasizing that it expects rates to stay at their current levels or below until at least the end of 2022. It will be important for them to emphasize that rate hikes are unlikely in 2022 and 2023. Otherwise, markets can assume that rates will rise further later.


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