House View, March 2020
- Given the current lack of visibility, financial markets are starting to anticipate quite a negative scenario. Equity valuations could start to discount a decline in 2020 expected earnings growth.
- We have downgraded our overall equities positioning to underweight from neutral to take account of spreading concerns about covid-19. We have also refrained from taking a buying opportunity until the risk of a global recession can be ruled out.
- Given the recent market correction and elevated volatility we are de-risking and adding to protection in portfolios, while opportunistically playing volatility as an asset class. Defensive currencies as well as quality in credit also look relatively attractive.
- The US dollar’s underperformance during market turmoil at the end of February highlights the erosion of its yield advantage and its long-term, fundamental overvaluation. The Swiss franc was strong in February, but could be confronted by more stringent intervention by the Swiss National Bank.
- Following its recent decline, the rise in concerns surrounding covid-19 is turning the yen into the most attractive defensive currency. Gold also continues to look attractive in spite of the recent rise in price. We have raised our 12-month projection for gold to USD1780 per troy ounce.
- Our ‘structural grower’ theme for 2020 remains the right call. The cyclical value tilt remains a good diversifier within an extremely polarised market.
- We are sticking to our underweight stance on EM equities for now, as the full impact of the coronavirus containment measures on supply chains and corporate earnings may have a second-round effect. However, we remain on the lookout for signs of a potential recovery, driven by depleted stocks and rebounding demand.
- Sector wise, we continue to expect a rebound in the earnings of semiconductor stocks, assuming covid-19 disruption remains limited. We also remain positive on US pharma, in spite of current political rhetoric.
- We see three strategic areas to explore in real estate: defensive assets that chime with demographic trends; investing in disruption; and positioning in distressed or stressed property assets that offer good potential. High volatility and low returns in classic asset classes is heightening the interest of private assets in general.
- EM central banks will likely continue cutting rates and since we expect the USD to weaken in H2, we retain our overweight on EM local-currency sovereign debt.
- We have moved from a neutral stance on European high yield to an underweight one as part of an overall effort to de-risk portfolios in the current environment. We remain neutral on EM corporate debt.