House View, November 2020

Macroeconomy

The upsurge in covid-19 cases will likely hurt global economic prospects in the current quarter. With a Democrat ‘blue wave’ failing materialise in the US elections, hopes of a substantial spending bill have faded and there is risk that US household incomes suffer as existing support measures fade. In the meantime, covid-19 infections continue surge in the US.

The Chinese recovery continues, supported by strong exports and solid improvement in fixed investment and consumption. We have revised up our Chinese GDP forecast for 2020 is to 2.1% from 1.8%, with our headline inflation forecast revised down slightly to 2.6% from 2.7%.

In Europe, after a better-than- expected rebound in Q3 GDP, new restrictions in the face a resurgence of the virus will weigh on Q4. We see Q4 euro area GDP falling 7.5% on last year’s figure with risks tilted to the downside as an extended lockdown in 2021 cannot be ruled out.

Currencies

Although thoughts of a large fiscal package are fading, further monetary stimulus could weigh on the US dollar, as could the prospect of reduced political uncertainties and smoother foreign relations. Our medium-term outlook for the greenback is negative. Prospects for the Chinese renminbi look more attractive.

Asset Allocation

The US election and resurgence of covid-19 cases mean caution is required as we wait for more visibility. Furthermore, US fiscal stimulus may not now be as big as expected. We remain underweight equities, maintaining portfolio protection while we wait for the approval of a viable vaccine against covid-19, which has potential to be a ‘game changer’.

The US election result has been reducing upward pressure on US Treasury yields, but increased spending could weigh on the performance of core government bonds further down the road. In credit, high leverage ratios, rich valuations and the lengthening of average maturities mean we are sticking to our preference for quality in this area. We continue to have a favourable medium-term opinion on Chinese assets, including the renminbi and local-currency bonds.

Equities

With reduced prospects for a substantial fiscal package or for corporate tax increases, the US elections may not be a game changer for equities. We remain underweight equities in US and Europe, where there is a risk that new lockdowns will derail the earnings recovery in Q4.

Sector wise, Big Tech should benefit from reduced tax and regulatory threats and continue to generate substantial free cash flow. Segments of US healthcare should also continue to prosper while we continue to like select high-quality US industrials.

Despite a sharp equity market rebound since the late March lows, foreigners have not bought back into EM equities. Until we see positive vaccine news and a clearer path towards economic recovery, North Asia (China, Taiwan, South Korea) is likely to keep outperforming other EM markets thanks to superior visibility on GDP and corporate earnings and more resilient currencies.

Fixed Income

Having risen before the elections, US Treasury yields fell back again afterwards. Despite the uncertain outlook caused by the resurgent pandemic, we see the 10-year Bund yield rebounding slightly by year’s end. Lockdown measures and the appearance of a viable vaccine could boost market confidence in H1 2021 and push European yields higher.

While high-yield (HY) spreads widened in response to fears over renewed lockdowns, more government support in US and Europe to mitigate this means we expect a renewed tightening of HY spreads by year’s end. An ECB decision to include fallen angels in an enlarged asset-purchase programme at its December meeting would give a boost to the euro HY market.

Alternatives

In hedge funds, wide divergence in earnings trajectories is providing rich opportunities for equity hedge managers. We maintain a positive view on macro strategies, which should benefit from volatility in currencies and rates markets as well as from breakout events such as this month’s US elections. We expect expanded opportunities for distressed strategies over the next 18 months.