House View, June 2020
- Oil prices have recovered significantly from their 20 April low. However, with elevated worldwide oil inventory levels close to saturation and economic recovery uncertain, further upside is limited.
- In spite of fiscal stimulus, consumer caution could prevail in the US. The shape of the post-/covid 19 recovery will more likely be an ‘asymmetric U’, rather than a ‘V’ and we are keeping our US 2020 GDP growth forecast at -7.7%. The European Commission’s proposal for a EUR750bn recovery fund is a major step towards fiscal integration, in spite of inevitable compromise.
- US-China tensions persist and recovery in the Chinese economy is gradual. Our Chinese GDP forecast for 2020 remains at 1.2%, and our headline inflation forecast at 3.0%. We maintain our Japanese GDP forecast of -5.8% for 2020.
Signs that the worst of the virus crisis is now behind us, coupled with a bold European fiscal plan, mean we have raised our three-month EUR/USD rate projection to USD1.08 (compared to USD1.05 previously). We expect a moderate appreciation of the euro thereafter, reaching USD1.16 on a 12-month horizon, mostly because of reduced demand for the safe-haven US dollar.
Asset Allocation, pages 12-13
- We have upgraded our conviction on euro area equities given increased prospects of coordinated fiscal policy impetus. While we have turned underweight on Asian (ex-Japan) equities, we remain neutral on Japanese equities, which tend to have better cash positions. Our focus remains on quality companies with strong balance sheets and low leverage.
- The pandemic is revealing some investment themes such as the prolonged downward pressure on interest rates and the increasing appeal of alternative assets as well as the support for corporate credit, especially investment-grade credit, arising from massive central bank support. We also see extra incentives for 'green' initiatives. In the shorter term, we expect fundamentals to re-assert themselves as economies re-open and companies start to provide guidance again.
- The valuation discount on Europe relative to the US had become extreme, justifying a value/cyclical rotation, and leading us to move from underweight to neutral on European equities.
- The market rebound in late-May was largely driven by cyclical sectors on which a sustained recovery in equities will greatly depend. Meanwhile, given the sector's low economic sensitivity, consensus expectations for 2021 earnings in healthcare are especially high. But earnings downgrades have trailing off in general, especially in the US, and valuations demanding on all metrics, this suggests investors are treating 2020 as a one-off.
- Continuing US-China tension will dampen the prospects for emerging markets equities in the coming months. We are currently monitoring the impact of moves to force Chinese companies to de-list from US exchanges.
With an end to lockdowns in sight, private-sector real estate holds the potential for attractive relative yields against a background of sustained interest rate cuts.
- We have moved from underweight to neutral on UK gilts given the limited risk of any significant rise in yields and our belief that gilts remain a safe haven.
- Although we remain underweight US High Yield in general, we are turning more positive on select, high-quality segments of this market. ‘Fallen angels’ eligible for direct Fed support could be an attractive prospect.