The challenges of the continuing pandemic will likely delay the cyclical recovery expected for 2021, but not cancel it. This leaves intact our favourable medium-term view on risk, particularly for equities.
Key market drivers
- Progress on vaccinations and expectations for additional fiscal stimulus in the US
- New virus strains and delays in vaccine rollouts delay the economic recovery
Views & asset allocation
- Fundamentals and market dynamics suggest medium-term upside for risky assets
- Bullish technical signals are starting to appear in some equity markets, but our indicators still advocate caution, with sideways moves expected during the first part of 2021
Tactically, we have reduced our exposure to risk for market-technical reasons and given the uncertainties over the near-term evolution of the pandemic. Given our flexible approach to asset allocation, we see any market consolidation in the short term as a buying opportunity.
Equities
We are neutral on equities overall with an overweight in EMU small caps against EMU large caps. Equity risk premiums are still high relative to real bond yields in the US, so equities remain attractive, even if valuations appear high.
Government bonds
We are short EMU bonds. Eurozone bond yields are exposed in the event of a cyclical recovery in the area. Being long EUR inflation-linked debt gives portfolios upside potential in reflationary environments.
Credit
We are long emerging market local currency debt amid the continued search for yield and expectations for EM currency appreciation.
READ THE LATEST ASSET ALLOCATION MONTHLY BY CHRISTOPHE MOULIN AND DANIEL MORRIS, WHICH ALSO HAS VIEWS ON CURRENCIES, COMMODITIES AND THEMATICS
