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Asset allocation monthly – Passing the baton

Outlooks & Research

Christophe MOULIN


Our medium-term scenario favours risk and equities given the fundamental factors, economic policy support from central banks and governments, and progress on vaccine rollouts and economies reopening.

  • Next to debt issuance, tax increases are seen as a source of US stimulus funding. The degree and composition of those increases looks set to affect the extent to which company profits can rise on the back of stimulus spending and the economic recovery. Less upside for profits could spur a normalisation of equity valuations.
  • Despite a short position in Eurozone equities, our net equity exposure remains long via US value, EM equities, Chinese equities and Japanese equities. We are long risky assets such as commodities and EM local debt. Portfolio diversifiers include gold and European real estate investment trusts.
  • We remain long EMU small caps. They are likely to outperform in an economic recovery on the back of being high beta and their more attractive valuations relative to large caps.
  • Real interest rates have moderated amid dovish signals from the US Federal Reserve on the need for policy action as the recovery progresses, but inflation pressures are building and inflation-adjusted rates are likely to rise again, leaving us cautious on duration. We see further upside scope in eurozone bond yields in the medium run, but we would look for better entry levels to re-establish shorts.
  • We are long EM local currency debt since we see room for yield spreads to narrow and for currencies to appreciate as the US dollar comes under pressure due to its high valuation and the prospect of an acceleration in growth outside the US.

Any views expressed here 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 hold different views and may take different investment decisions for different clients. This document does not constitute investment advice.

The value of investments and the income they generate may go down as well as up and it is possible that investors will not recover their initial outlay. Past performance is no guarantee for future returns.

Investing in emerging markets, or specialised or restricted sectors is likely to be subject to a higher-than-average volatility due to a high degree of concentration, greater uncertainty because less information is 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, services for portfolio transactions, liquidation and conservation on behalf of funds invested in emerging markets may carry greater risk.

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