House View, February 2020
- We remain neutral on global equities and have recently tilted to building up more protection for portfolios, either by reinforcing our gold positions or buying put options on US equities. Markets can be expected to remain nervous, both because of the coronavirus and the US election cycle. However, despite high valuations, equities are still being bolstered by low bond yields.
- We have moved from an underweight to a neutral stance on euro periphery bonds in response to fading near-term political risk. We also continue to overweight local-currency emerging-market (EM) corporate bonds, which will benefit from the US dollar’s gradual retreat.
- Along with gold, we maintain an overweight stance on liquidity while remaining keen on short-term alternatives to cash.
- Our scenario of a 0.5mbd supply overhang in H1 2020 and a fall in the Brent price towards USD50 would seem to be validated by recent developments, most notably fears for a drop in global oil demand as a result of the coronavirus outbreak in China.
- While we still expect the US dollar to weaken during 2020, the growth and interest rate differentials that have been sustaining it may decline more slowly than we initially thought. We have a 12-month target of USD1.15 against the euro.
- We expect below-average returns from developed-market equities this year. We believe earnings growth will be scarce, with cash dominating returns to investors. We still see potential in quality cyclical stocks, especially in Europe.
- The coronavirus interrupted the comeback in EM equities visible in recent months. With the economic impact already shaping up to be substantial, the epidemic will need to peak before we see an upturn in EM equities’ prospects.
- Defensive sectors can be expected to fare better than cyclical ones and energy until growth fears connected to the coronavirus fade. We are cautious about European consumer companies exposed to China. We also expect volatility in areas such as US healthcare as the presidential election approaches.
- At this late stage in the economic cycle, there are still bottom-up opportunities in some areas of European real estate, while demographic changes (ageing societies and the sharp increase in single-person households) offer longer-term opportunities.
- Regional elections in late January provided a fillip to Italian bonds, with a drop in their spread over Bunds. We have moved from underweight to neutral on euro periphery bonds, believing the positive yield offered by Italian bonds could attract more investor interest.
- With oil prices under pressure, we see increasing fragility in US high-yield bonds, on which we are underweight. We continue to focus on quality in high yield generally.