House View, October 2020

Asset Allocation

Rising coronavirus cases accompanied by flagging recovery momentum and a fractious run-up to the US elections make prospects for equities highly reliant on 3Q results and further policy stimulus. Against this background we have downgraded our stance on euro area equities from neutral to underweight, following a similar downgrade for US equities in August.

We continue to like structural growth drivers and select, high-quality cyclical stocks. We also prefer companies with sufficiently strong balance sheets and pricing power to make them resilient to volatility.

The stability provided by the European Central Bank and EU recovery fund is making us more upbeat on peripheral euro area bonds. With base rates remaining low, reasonable growth and low inflation could mean the environment remains supportive for investment-grade bonds.

Macroeconomy

Hopes are fading for a new fiscal deal ahead of the US elections. We believe a Joe Biden win would mean more for macroeconomic stimulus than a Trump re-election. This stimulus could be bigger if Democrats gain control of the Senate.

Leading indicators point to a two-speed recovery in the euro area on both a country and sector level. Prolonged covid-related restrictions are hitting services hard, but manufacturing is holding up. Consumer and business caution means core inflation will stay low, necessitating more policy accommodation. We expect the ECB to increase PEPP asset purchases by EUR500bn in December 2020.

While we still think a post-Brexit trade deal will be struck. The 2021 rebound in the UK may be shallower in the UK than in other European countries. China data continues to provide evidence of a solid recovery.

In Japan, new PM Suga will continue with Abenomics.

Commodities

With undersupply likely to last for a while due to the challenges facing the US shale oil industry and OPEC+ production discipline, we now see Brent oil reaching USD50 in H1 2021 and USD55 by end-2021.

Currencies

Economic and electoral uncertainties has brought the safe haven role of the US dollar to the fore again and helped the currency to rebound. But we believe these factors will be temporary for a fundamentally overvalued dollar. The yen could gain in appeal if global risk aversion continues.

Equities

European equity indexes fared relatively better than their US peers in September, although the former face Brexit tensions and the fallout from rising coronavirus cases. In the US, equity market concentration showed signs of fading as tech stocks corrected. The earnings outlook in the US is still rosier than in Europe.

Following a price correction, prices for tech stocks look more palatable against a background of an unchanged earnings outlook. We expect tech to continue to perform regardless of short-term valuation issues. We remain constructive on the European car sector. While recovery may not be linear, we see positive earnings revisions in the sector ahead.

Fixed Income

While developed-market central banks are expected to ease policy further, low rates are here to stay.

A further pick-up in default rates should remain confined to the lowest-rated segment. For this reason, we are maintaining our bias toward quality in high yield while keeping our underweight stance to this market overall.

Asian Assets

As they become more accepted on global bond indices, Chinese sovereign bonds are steadily attracting interest. Recent renminbi strength brings larger returns for foreign investors once converted into US dollars. The Chinese currency could remain well supported in the medium term. In equities, we maintain our preference for North Asia despite caution on EM equities overall.