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# 01 January CROSS ASSET 2021 Investment Strategy CIO VIEWS The big shock, the big hope, the big illusions THIS MONTH’S TOPIC 2021 global outlook reassessed Document for the exclusive attention of professional clients, investment services providers and any other professional of the financial industry
CROSS ASSET #01
INVESTMENT STRATEGY
#01 - January 2021
Table of contents
Global Investment Views
CIO Views Multi-asset
The big shock, the big hope, the big illusions p. 3 Reinforce cyclicality with relative value
2020 was an unprecedented year in modern history, and and hedges p. 5
the big shock witnessed is not going to reverse completely. We maintain a pro-cyclical tilt and believe the reflation trade
Entering 2021, the reflation phase may continue, but investors can continue, but investors must protect their equity and credit
will have to assess four key factors – success on large-scale exposure through robust hedges.
vaccine dissemination, continuation of fiscal and monetary
stimulus, global recovery led by China and the risk around Fixed income
consensus itself. Lower expected returns in bonds amid low
“Great discrimination” in credit p. 6
rates and tight credit spreads mean that investors will have
to embrace higher risk (higher equity) to reach their return Economic reopening could raise inflation expectations in the
targets. In doing this, investors should not underestimate the US, affecting real yields. Investors should use credit research
importance of diversification and strong hedging. as a means to strike a balance between higher yields and high
quality.
Macro
Equity
ECB: strong support to Euro fixed income
in 2021 p. 4 Still room for Value to catch up p. 7
The increased stimulus is consistent with a scenario of low Despite the recent outperformance of Value vs Growth, the
rates for longer and search for yield in the Eurozone. catch-up potential for Value is significant and depends on
earnings growth and economic normalisation.
This Month’s Topic
2021 global outlook reassessed p. 8
As the Q420 is now closed, we confirm the “financial recovery regime” as our central scenario for 2021 with a higher conviction than in
Q320. We expect better corporate fundamentals at a global level going forward. The rebound of EPS growth will eventually validate
current asset price levels in the context of low interest rates. This explains our cautious optimism for the coming quarters. We have also
analysed the sustainability of the ongoing risk rotation from Credit HY to value/cyclical equities. We confirm our constructive medium-
term view with a continuation and maturing of the financial recovery regime.
Thematic Global views
Is the euro’s rise a sign of greater resilience? p. 14
The complexity and fragility of European institutions have contributed to maintaining a specific political risk premium on European assets, including
the euro. But institutions were ultimately strengthened when negotiators agreed in July to launch the New Generation EU package. The euro’s recent
appreciation may be an early sign of decline in this risk premium. Foreign investors may therefore want to rebalance their portfolios in favour of
Eurozone assets, which could push the euro higher. Should the euro appreciate too fast, the ECB would not stay on the side-lines.
Thematic
United States: the power of Executive Orders p. 16
Following the elections in Georgia, the Democrats have a very small majority in Congress. To facilitate governance, the new
administration is likely to continue to govern using Executive Orders (EOs). Their use has grown over time, and they have become a
full-fledged instrument of governance.
Market scenarios & risks Macroeconomic picture
> Central & alternative scenarios p. 18 > Developed countries p. 23
Macroeconomic outlook - Market forecasts
> Top risks p. 19
> Emerging countries p. 24
> Cross asset dispatch: Macroeconomic outlook - Market forecasts
Detecting markets turning points p. 20
> M acro and market forecasts p. 25
> Global research clips p. 21
> Disclaimer to our forecasts / Methodology p. 26
> Amundi asset class views p. 22
> Publications highlights p. 27
2- Document for the exclusive attention of professional clients, investment services providers and any other professional of the financial industry
CROSS ASSET #01
INVESTMENT STRATEGY
CIO VIEWS The big shock, the big hope, the big
illusions
2020 has been an unprecedented year in modern history, with the Covid-19 pandemic
leading to the deepest global recession post World War II that has affected the most
countries simultaneously since the 1870s (World Bank). This big shock is not going to
reverse completely, and the old normal will not return as it used to be. Hopes for a fast
vaccine distribution, a further fiscal push, and for decreasing geopolitical tensions are all
driving the reflation narrative. As a result, despite the recession, most markets are closing
the year with positive performances. Entering 2021, the reflation phase may continue, but
investors will have to assess four factors to play the rotation, avoid bubbles, and build
resilient portfolios.
Factor 1. Recent market rally is based on blind faith in the success of vaccines and on
BLANQUÉ Pascal the brave assumption that everything will be as before. This is the first source of risk – not
Group Chief Investment Officer only because the production, and dissemination, of vaccines on a large scale is not a trivial
endeavour, but also because markets are assuming that a large majority of the population
will be vaccinated. The idea of normality being just around the corner is a chimera, and this
will bring up all the issues associated with this scattered restart. For investors, distribution
of a vaccine should further support recovery and the case for favouring equity vs HY
credit. In this rotation, Value will benefit the most while investors should stay cautious in
the most crowded growth areas, where a significant bubble could be under pressure in a
reflation environment.
Factor 2. Fiscal and monetary policy are keeping the economic system going, but what
has been put in place so far is insufficient – especially on the fiscal side – but also not always
well directed or calibrated. Any withdrawal of measures is unthinkable; on the contrary,
CBs will be called upon to do more, and the risk of a policy mistake is underestimated
MORTIER Vincent by the market. On the other hand, some inflation pressure will eventually materialise. At
Deputy Group Chief Investment the beginning of 2021, 10Y Treasury yields are now above 1%, the highest level since last
Officer March.. Should the recovery drive some higher inflation, yields could rise further, with
some possible domino effects on markets. Again, we do not expect to see high inflation
tomorrow, but buoyant housing markets, supply chain relocations, and a huge amount of
savings waiting to fuel pent-up demand could rapidly change the zero inflation narrative
forever. It’s likely that the Fed will intervene in case of any quick move in yields in a sort
of curve-control mode. Investors should be watchful of inflation to avoid being trapped in
the long-duration trade, which is increasingly risky. We recommend a balanced approach
to duration and investors should consider exposure to US inflation which could be first to
materialise in a weak dollar scenario.
Factor 3. The recovery path is being led by China. It is leading the way out of the crisis
as the only big economy to fully recover in 2020. In 2021, China should continue on this
trajectory of faster growth compared to the RoW, lifting EM Asia and with a positive
feedback loop, especially with Europe, given the strong trade links with China and Asia.
Investors should consider entering 2021 with an allocation to EM, and Chinese and Asian
equities. In fact, despite the strong performance seen in 2020, there is room for further
Overall risk sentiment growth, in our view, especially in areas more linked to internal demand.
Factor 4. The key risk today in the market is the consensus itself. The skyrocketing
Risk off Risk on negative-yielding debt will push the search for yield to the extreme. The temptation to go
down in quality is high as well as to make all the same low-interest-rate forever bets. But,
this is dangerous, if we consider the scarce market liquidity in the system. For investors,
credit selection is paramount, but it is key to look across the board to search for yield.
Including investments in private markets, for investors with the appropriate time horizon,
Watch out for inflation and will provide a wider and diversified spectrum of opportunities. In addition, investors should
selective rotation into equities balance the appetite for yield in HY and EM bonds (including LC) and credit with exposure
balanced by the need for hedges to government bonds as liquidity providers and diversifiers in asset allocation.
and duration exposure
Investors will enter 2021 with a positive backdrop for equities. Lower expected returns
Changes vs. previous month in bonds amid low interest rates and tight credit spreads mean that investors will have to
Exploit rotation opportunities in embrace higher risk (higher equity) to reach their return targets. Volatility could also return
cyclical, value segments in ‘stop-and-go’ phases related to vaccine distribution. This reminds us of the importance
UK assets upgraded (equities and of adding further sources of diversification with uncorrelated investment strategies
GBP) and keeping some hedges in place. The outlook is positive, but the road to recovery will
Use TIPS for diversification and likely be bumpy. Fasten your seat belt and watch out for a 2021 full of opportunities.
inflation protection
Overall risk sentiment is a qualitative
view of the overall risk assessment
of the most recent global investment
committee.
Document for the exclusive attention of professional clients, investment services providers and any other professional of the financial industry -3
CROSS ASSET #01
INVESTMENT STRATEGY
MACRO ECB: strong support to Euro fixed income
in 2021
Very much in line with consensus and market Between the now larger PEPP and APP, the
expectations, the package delivered by the ECB will in fact have more than €1.4tn of
ECB at its December meeting combined remaining net purchasing capacity by end-
additional measures of quantitative easing March 2022.
(QE) with further support to the financial ECB QE also looks more than sufficient to
system. The pandemic programme (PEPP) cover eventual additional Euro government
was extended in time and increased by EUR bond net funding that may be needed to
500bn while the APP (Asset Purchasing finance new support measures to counteract
Programme) was confirmed to proceed at negative impacts from current restrictions
the current path of EUR 20bn in purchases and to increase its presence in supranational
per month, meaning additional firepower segment as well in sight stronger EU issuance.
DEFEND Monica
of EUR 300bn over 15 months. Measures On the TLTRO side as well, our guess is that the
Global Head of Research
in support of the financial system came new measures will be effective in keeping
through the TLTRO 1 tool, extended, a high level of liquidity available in the
enlarged in its scope and confirmed in terms financial system, indirectly supporting bond
of very favourable conditions attached technicals.
to ECB lending operations. A nine-month Ultra-cheap credit for banks, even with strong
extension of the PEPP into 1Q22 is longer conditionality, will not be enough to avoid a
than the six-month (end 2021) extension tightening in banks’ lending conditions for
generally expected by consensus, but the companies. This crisis has been characterised
decision appears to be consistent with by contra-cyclical credit conditions, thanks
recent messages from many ECB members to the coordinated actions of CBs and
on the importance of both the size and governments.
AINOUZ Valentine duration of the stimulus. The extension
In recent months, banks’ credit conditions
of the reinvestments horizon of maturing
Deputy Head of Developed have remained accommodative, thanks to
Markets Strategy research
bonds is very much in the same direction
(1) strong liquidity injections via TLTROs
as well.
and (2) government loan guarantees. The
The ECB’s emphasis has turned mostly on massive supply of credit for all businesses has
providing and keeping favourable funding limited corporate defaults and the long-term
conditions for as long as needed to support economic damage from this crisis. We remain
economic growth in recovering from the concerned about a significant tightening in
pandemic crisis. In the Q&A following the bank lending conditions once government
meeting, President Lagarde underlined that guaranteed loans expire. Banks had already
the strategy of the ECB aims at “preserving curtailed access to corporate credit in Q3 and
favourable financing conditions over the expected to tighten further in the coming three
pandemic period”, defining them “in a very months. “Banks referred to the deterioration of
holistic way”, namely “for all sectors of the general economic outlook, increased credit
BERTONCINI Sergio the economy.” Therefore, the ECB made it risk of borrowers and a lower risk tolerance as
Senior Fixed Income Strategist clear that lending rates to households and relevant factors for the tightening of their credit
corporates, and at sovereign levels are all standards for loans to firms and households”.
within the scope of the support, together
The duration of the monetary support is as
with credit flows to the economy. In order
key as the degree of accommodation. A lot
to reach this target, the ECB calibrated a
of monetary and fiscal support is currently
very strong increase in its QE, securing a
justified by the pandemic. However, very
“significant constant market presence”
accommodative monetary policy will still be
which will provide the central bank with
needed after March 2022. In the coming years,
the necessary flexibility for managing its
(1) inflation is expected to remain well below
QE. In this respect, the ECB president also
the 2% target and (2) economic fragmentation
underlined the symmetry of the eventual
The increased stimulus pace of adjustment as on one side, the
among Eurozone countries will continue to be
a challenge.
is consistent with a envelope represents a ceiling and “does not
have to be spent in a pre-defined way, or In 2021, questions and concerns will arise
scenario of low rates for even in full”, but “equally, the envelope can about what kind of monetary support is
longer and search for be increased if it is necessary.” required once the coronavirus crisis ends.
It is likely that the more hawkish members
yield in the Eurozone We assess that the increased stimulus looks
of the ECB will be more opinionated on this
consistent with the objective of keeping
issue.
up support for technicals regarding fixed
income markets into 2021 and thus supporting
the current low rates for longer scenario as well
as the yield search.
1
TLTRO= targeted longer-term refinancing operations.
4- Document for the exclusive attention of professional clients, investment services providers and any other professional of the financial industry
CROSS ASSET #01
INVESTMENT STRATEGY
MULTI-ASSET Reinforce cyclicality with relative value and
hedges
We continue to see support for risky assets tail risks for 2021 are tilted to the upside,
as we move into 2021, backed by the shift linked with US political developments and
from a contraction phase to a recovery. the effects of a reflationary environment,
Importantly, the US Senate runoffs won by especially if the Fed is perceived to be
the Democrates strenghten the reflation behind the curve. We also stay positive
trade narrative and the positive backdrop on US inflation. On Euro peripheral debt,
for cyclical segments. In this environment, our view remains constructive, especially
equity remains more attractive than on the 5Y BTP, which now offers lower
bonds and we see some upside over a potential for spread tightening, but is still
one- year horizon. We are mindful that supported by strong technicals. We are
this recovery is different from those in the positive on credit as demand for carry and
GERMANO Matteo past in the sense that equity valuations QE should support it, but we favour EUR
Head of Multi-Asset are already high as we enter this phase IG over US due to attractive valuations, the
and it is dependent on an effective, large- ECB’s recent extension of its purchasing
scale rollout of vaccines. As a result, programmes and lower leverage in EUR IG.
we recommend that investors be very Investors’ search for yield would support
selective and valuation-conscious across a ‘smart income’ strategy in EM HC
the asset spectrum. where we stay constructive, but believe
potential for spread tightening is higher in
High conviction ideas HY compared to IG. On FX, maintain our
Overall constructive on DM equities due positive view on the Russian ruble, Mexican
to positive momentum on PMIs and strong peso and Indonesia rupiah.
fundamentals, we have upgraded our In DM FX, we are positive on CAD vs
view on the UK amid the current ‘Brexit USD as we believe an economic recovery
discount’ and improving earnings revisions, could weigh on the greenback, which
We maintain a pro- but stay vigilant. On the other hand, we already looks overvalued. On the other
continue to believe that Japanese and hand, growth in Canada is proving to be
cyclical tilt and believe Pacific-ex-Japan (Australia) equities stronger than expected and the CAD has
the reflation trade should benefit from an economic rebound. lagged the rest of commodity FX in 2H20.
Their high operating leverage means Another factor supporting the CAD is that
can continue, but profit margins could grow in proportion carry is the highest in Canada among the
investors must protect to the higher sales we expect in 2021. On G10. Secondly, we upgraded our stance
EM, we remain optimistic overall, with a on the GBP to neutral vs the USD and EUR
their equity and credit positive view on Asia. In particular, with an in the prospect of a Brexit deal, but are
exposure through eye for relative value, we now believe the monitoring the situation closely.
Chinese A-share market (largely financials,
robust hedges conventional consumption) should do well Risks and hedging
vs MSCI China (ie, internet, e-commerce
Additional waves of coronavirus infections
and telecoms) while financials should
and accompanying lockdowns, a premature
benefit from the improving economic
withdrawal of stimulus and geopolitical
momentum supporting the factor-rotation
tensions represent credible risks to an
towards Value and Laggards; internet-
economic recovery. As a result, investors
related segments may be weighed on
should maintain robust hedging structures
by a regulatory overhang. Financials will
in the form of derivatives, JPY, USD and
also benefit from favourable technicals,
USTs to safeguard credit and equities
sentiment (potential inclusion in MSCI
exposure. We also believe gold continues
indices) and earnings.
to act as a strong hedge in the current
On duration, we remain positive on the environment.
10Y UST from a tactical perspective as
Amundi Cross Asset Convictions
1 month change --- -- - 0 + ++ +++
Equities
Credit
Duration
Oil
Gold
Source: Amundi. The table represents a cross-asset assessment on a 3- to 6-month horizon based on views expressed at the most recent global investment committee. The outlook, changes in outlook and opinions on the asset class
assessment reflect the expected direction (+/-) and the strength of the conviction (+/++/+++). This assessment is subject to change.
UST = US Treasury, DM = Developed markets, EM/GEM = Emerging markets, FX = Foreign exchange, FI = Fixed income, IG = Investment grade, HY = High yield, CBs = central banks, BTP = Italian government bonds, EMBI = EM Bonds Index.
Document for the exclusive attention of professional clients, investment services providers and any other professional of the financial industry -5
CROSS ASSET #01
INVESTMENT STRATEGY
FIXED INCOME “Great discrimination” in credit
The Q3 rebound in GDP numbers was US fixed income
stronger than expected, but renewed
As we move out of the pandemic and see
lockdowns due to the second wave of
large-scale vaccine distribution, we believe,
Covid-19 infections could affect economic
the pent-up demand for goods and services
activity in 4Q20 and 1Q21. On the
from US consumers (supported by savings),
vaccine front, a large-scale rollout and
coupled with the Fed’s lower-for-longer
accommodative policies, as put in place by
stance, should push up inflation. Accordingly,
the ECB at its latest policy review meeting,
we believe TIPS are a good way to diversify
should drive a recovery in global GDP in 2H21,
portfolios and protect from inflation. On the
providing a supportive environment for risky
other hand, deficit spending and increased
BRARD Éric assets. However, in credit, there is a wide
UST issuance may put upward pressure on
gap between valuations and fundamentals.
Head of Fixed Income yields, leading to some steepening. Hence,
So, we recommend investors balance their
we remain defensive, but believe UST
search for yield with quality credit through
futures offer strong liquidity. On credit,
strong research and selection.
active selection and research are crucial
Global and European fixed income in allowing investors to de-risk portfolios.
We think investors should avoid sectors
With an overall cautious view on that have completely normalised. In fact,
duration, we marginally downgraded current conditions are ripe for idiosyncratic
our US stance to move close to neutral aspects rather than a complete market beta
and maintain our defensive position on exposure. In particular, consumer (esoteric
core Europe. We remain constructive on ABS) and residential mortgage markets
peripheral debt mainly through Italy (ECB (agency mortgages) remain attractive
SYZDYKOV Yerlan support, strong EU policy response) even in light of strong aggregate consumer
Global Head of Emerging Markets though the likelihood of spread tightening earnings, savings and debt repayments.
going forward is now lower. On the US
curve, we stay vigilant on the 2Y, 10Y and EM bonds
30Y segments. Finally, we upgraded our
Overall positive on EM FI, we believe there
US break-even view, favouring 5Y over 10Y,
is still room for spread compression in HY.
and believe valuations are attractive in the
Local FX is supported by low yields globally,
EZ. The upside potential in break-even is
benign inflation, stable US policy, and an
not currently priced-in by the markets. We
early-cycle growth environment. Asian
remain constructive on credit, particularly
growth could outperform other regions
cyclicals, and see the recent rally as an
in 1H21, offering selective opportunities.
opportunity to lock in some gains without
In Turkey, we acknowledge risks related
altering our stance. Ihe scope for further
to the BoP and lira, but believe there are
J. TAUBES Kenneth spread compression is higher in HY vs IG,
opportunities amid credible normalisation
in BBB vs A-rated, and in subordinated
CIO of US Investment of economic policies and cheap valuations.
Management vs senior debt. However, markets are
not far from a situation where spreads FX
do not appropriately reward for the risk.
Hence, we stay very active. At a sector We are cautious on USD/JPY and USD/CNY
level, we are positive on financials and given improving environment for cyclical
telecommunications, but cautious on basic FX. Our constructive view on NOK/EUR is
Inflation and US
utilities, healthcare and transportation. IG credit
also maintained.
Economic reopening
Inflation and US IG credit
could raise inflation
10
expectations in the US,
8 Inflation adjusted real yields in
affecting real yields. US IG credit turned negative in
Investors should use 6 the first week of Dec 2020
%
credit research as 4
a means to strike a 2
balance between higher 0
2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020
yields and high quality -2
US IG real yield US IG nominal yield US 10y breakeven rate
Source: Amundi, Bloomberg at 14 December 2020. Yield to worst for Bloomberg Barclays US Total Return Index.
GFI= Global Fixed Income, GEMs/EM FX = Global emerging markets foreign exchange, HY = High yield, IG = Investment grade, EUR = Euro, UST = US Treasuries, RMBS
= Residential mortgage-backed securities, ABS = Asset-backed securities, HC = Hard currency, LC = Local currency, CRE = Commercial real estate, CEE = Central and
Eastern Europe, JBGs = Japanese government bonds, EZ = Eurozone. BoP = Balance of Payments.
6- Document for the exclusive attention of professional clients, investment services providers and any other professional of the financial industry
CROSS ASSET #01
INVESTMENT STRATEGY
EQUITY Still room for Value to catch up
Overall assessment US equities
The progress on vaccines globally and the We believe equities are more attractive
approval of one in the UK and two in the than credit from an income perspective,
US seem to have put a time limit on the but, however, this doesn’t eliminate the
pandemic, which is encouraging markets need to stay active. In fact, selection is
to look into the future. On the corporate even more important today because there
front, earnings growth is expected to be are pockets of extreme valuations in the
significant in 2021, driven by continued market. However, digging deeper, investors
stimulus and an economic recovery. should avoid hyper-growth stocks and see
However, stretched valuations in some if continuous fiscal stimulus, a recovery
ELMGREEN Kasper segments, risks of multiple Covid-19 waves, in 2021, and improvement in corporate
Head of Equities and worries over corporate solvency earnings drive a rotation from the mega-
require a selective approach. We believe cap growth stocks towards more cyclical
that a fundamental, bottom-up analysis of growth and cyclical value stocks. The
businesses with quality balance sheets will last should benefit from lower interest
be crucial for sustainable returns. rate sensitivity. Growth names are more
rate-sensitive because they have a higher
European equities dependency on future earnings and would
Given that reopening of the economy is be more negatively affected by rising
very much dependent on a large-scale discount rates. Conversely, financials,
vaccine rollout, we maintain a balanced heavily represented in the Value universe,
stance, with a bias towards normalisation would benefit from a steeper yield curve.
and recovery. This supports our barbell As a result, investors should: (1) consider
SYZDYKOV Yerlan stance regarding defensive Inflation
sectors and
such USas shifting
IG creditaway from hyper-growth and high
Global Head of Emerging Markets healthcare and telecommunication services, momentum stocks and move to reasonably
on the one hand, and quality cyclical stocks priced, stable growth names (ie, medical
in 10
the industrials and material sectors, on devices); (2) aim to benefit from a rotation
the other. While we are optimistic on the favouring high-quality Value stocks (ie,
last 8two, we became marginally positive on Inflation adjusted
industrial automation, parcelreal yields in and
delivery);
US IG credit turned
(3) explore opportunities negative
in the in
ESG space.
financials,
6
which should benefit from a shift the first week of Dec 2020
towards Value. Interestingly, the last month
EM equities
%
saw Value investing coming back in favour
4
vs Growth.
2
However, on a longer historical While geopolitical risks remain on our radar
perspective, the Growth vs Value premium for EM assets, we continue to be constructive
is still
0 high. We believe the potential for about exploring names in countries where
Value2000 2002
to outperform 2004
is still 2006 2008 but 2010economic
significant, 2012 activity
2014 2016 rebounded.
has 2018 2020
At a
-2
J. TAUBES Kenneth US IG real yield
depends on the aforementioned US IG nominal
vaccine yield level, we
sector US 10y
arebreakeven rate positive on
selectively
CIO of US Investment rollout,
Source:economic recovery,
Amundi, Bloomberg at 14 improving PMIs,
December 2020. techforand
Yield to worst internet,
Bloomberg Barclaysconsumer discretionary
US Total Return Index.
Management and direction of rates. Therefore, we prioritise and industrials, but are mindful of extreme
process discipline and stock selection, all the valuations in these areas. We don’t like
while managing market and style risks. In sectors where profitability may be restrained
contrast, we are more cautious on consumer by government action. Stylistically
discretionary, but have maintained our speaking, our tendency is to look for value
negative view on tech. In all cases, though, with sufficient cyclical growth and quality
we focus on resilient businessesMSCI World growth/value characteristics.- CVI
Despite the recent
MSCI World growth/value - Composite valuation indicator (CVI)*
outperformance of
250%
Value vs Growth, the 228%
200%
catch-up potential for
150%
Value is significant and
depends on earnings 100%
growth and economic 50%
normalisation 0%
1979 1983 1987 1991 1995 1999 2003 2007 2011 2015 2019
Growth vs Value premium Average +1 SD -1 SD +2 SD
Source: Amundi Research, Datastream on 15 December 2020.
*CVI: based on a basket of criteria in absolute terms – trailing price-to-earnings ratio (PE), price-to-book value (P/BV) and
dividend yield (DY), and ranked in percentile, ranging from 0% to 100% (the percentage of time this basket was cheaper
since 1979: 0% never been cheaper; 100% never been more expensive).
Document for the exclusive attention of professional clients, investment services providers and any other professional of the financial industry -7
CROSS ASSET #01
INVESTMENT STRATEGY
THIS MONTH’S TOPIC 2021 global outlook reassessed
As the Q420 is now closed, we confirm the “financial recovery regime” as
our central scenario for 2021 with a higher conviction than in Q320. We
expect better corporate fundamentals at a global level going forward. The
rebound of EPS growth will eventually validate current asset price levels
in the context of low interest rates. This explains our cautious optimism
for the coming quarters. We have also analysed the sustainability of the
ongoing risk rotation from Credit HY to value/cyclical equities. We confirm
our constructive medium-term view with a continuation and maturing of
the financial recovery regime.
I - U pdating our 2021 economic rise in electricity prices and the progressive
outlook phase-out of various VAT cuts introduced
in 2020. Overall, inflation in emerging
DEFEND Monica
economies is already at or closer to the
Global Head of Research Growth outlook reloaded
CBs targets than in advanced economies.
Implications of 4Q20
R eiterate our 2021 global growth
Compared to our previous quarter forecast
With the contribution of: assessment, the outlook for economic
growth in 2021 has seen a mild shift in From a growth perspective, our global
BERARDI Alessia, favour of Emerging Economies. outlook for 2021 remains broadly stable;
Growth has become firmer in the US and while still dominated by base effects, it also
Head of Emerging Markets Macro
has slightly improved in Japan driven by factors in moderately stronger quarterly
and Strategy Research
more substantial fiscal support plans in growth patterns. As of December 31st, our
the US, and by a stronger base effect than 2021 global growth assumption ranges from
PORTELLI Lorenzo
in 2020 in Japan. In Europe, 2021 growth 4.9% to 5.7%. The fiscal lever will be a key
Head of Cross Asset Research
expectations are curtailed due to the driver in supporting the recovery, especially in
USARDI Annalisa, current developments in the pandemic and AEs. In the US, while the vaccination campaign
weaker base effects than in 2020 (better- remains in progress but virus containment
Senior Economist, CFA
than-expected growth in Q3). measures could still dampen activity. A new
fiscal package will support the economy in the
Growth in the Emerging Markets increased first half of the year (worth almost 1% of 2021
mildly in 2020 versus expectations on GDP growth, according to our calculations).
stronger-than-anticipated Q3, while There is some upside to our expectations as we
expectations have remained stable in conservatively embedded a skinnier package
2021 with the exception of Brazil and in our original projections than the USD900b
South Africa. In both of these countries, signed by the US President on December
we expect a weaker base effect in 2021 27th. Moreover with the majority in Congress
than in 2020. Moreover, a slower resolution post the senate runoffs in Georgia, Joe Biden
of the fiscal situation in Brazil and a less should be able to add further fiscal stimulus.
buoyant global economy at the turn of the In the Eurozone, the Next Generation EU
year should weigh on growth, on top of (NGEU) plan is a key factor that is expected to
the new lockdown measures enforced in drive growth above potential from the second
South Africa. part of the year, particularly in key vulnerable
The ongoing supportive policy mix is countries. We expect EZ growth to be steady
the main driver behind our constructive and range from 4.3 to 5.1% in 2021 and from
growth outlook in both the DM and EM. 3.6 % 4.2% in 2022 outperforming the US
The effectiveness of the vaccine and herd (see table following page). The combination
immunisation through its mass distribution of the vaccination campaign reaching “herd
in 2021 are pivotal assumptions on which immunity” level and the release of pent-up-
this outlook hinges. demand reinforcing the plan’s impact, creating
Inflation in advanced economies is set to a sort of virtuous cycle, is a key feature of this
remain broadly in check or subdued, with scenario. We should therefore be vigilant on
of some temporary jumps linked to reversing the implementation risks.
base effects. While we see progress made With growth recovering somewhat
toward the targets of DM central banks, we faster, the inflation outlook has been
do not expect to see uncontrolled inflation broadly muted, in particular in the
in the foreseeable future. Inflationary DMs due to a broad deceleration in the
trends in the EM look more mixed. In most second half of 2020. The new wave of
cases, recent dynamics, particularly in the virus in Q4 introduced an additional
China, have been dictated by specific and source of volatility to the macro data, with
seasonal factors, and therefore temporary. the new restrictions impacting activity,
Still, there are idiosyncratic stories, such as particularly in the services sector. While
Turkey, where inflation should remain very representing only a proxy, a broad set of
high due to strong currency depreciation, a high-frequency indicators such as mobility
8- Document for the exclusive attention of professional clients, investment services providers and any other professional of the financial industry
CROSS ASSET #01
INVESTMENT STRATEGY
data and electricity consumption tend to the financial markets when corporate
THIS MONTH’S TOPIC show a new decline in Q4 in areas where fundamentals rebound 1 .
more severe lockdowns were implemented As a conclusion, the new wave of
(e.g. the Eurozone), in line with the scenario infections and the selective lockdowns
of a gradual but uneven recovery. implemented in several countries across
Relapses in the real economy will occur the different regions makes the global
due to virus outbreaks, while policy economic recovery increasingly uneven
intervention will hopefully be an option and heterogeneous. The speed and
to help speed things along. Moreover, effectiveness of the vaccination campaign
the world’s central banks are committed will be key drivers in releasing pent-up
to maintaining unconventional monetary demand, and shaping the recovery growth
policies and easing financial conditions for trajectories, together with the fiscal and
a long period of time. This will support monetary policy mixes.
1
I n our central scenario, this translates into pre-Covid 19 economic levels not being reached for several
more quarters on average (with the exception of China, the only economy showing a proper V shaped
recovery).
What surprised in the Q4 2020
While uncertainty remains pervasive, our short-term cautious optimism takes the
following into account.
hile progress on vaccine availability increased somewhat faster than we
W
had anticipated, the new wave of infections across regions and particularly
in the US and Europe may offset the confidence from the early start of the
vaccination campaign. The health measures to tackle the new wave, implemented
with different degrees of severity and implications for mobility, are generating a
remarkable deceleration in high frequency data, and in some regions causing an
economic contraction. While in the US these developments do not seem to have
compromised Q4 growth, even if it is has slowed significantly, in Europe there are
signs of an outright contraction, albeit at a fraction of that seen in Q2. The recovery
should resume gradually and unevenly from Q1 2021. Growth over the year should
be driven by extraordinary base effects which should offset the unprecedented
losses in Q2 2020.
In the US, the odds of a bi-partisan fiscal package being delivered during the
lame duck period seemed low a few months ago, yet before the year-end Congress
approved a USD900+ billion fiscal package that should offset the weak momentum
seen in Q4, lift households’ disposable income in the first half of the year, and revive
growth momentum.
In the EU, the recent agreement on the NGEU multi-annual budget gives the
green light for its implementation, overcoming the opposition previously expressed
by Poland and Hungary, which made the negotiations tougher and increased
uncertainty around its delivery and the timing of its implementation.
T he financial markets kept a close eye on the pandemic logistics and moved
on the positive vaccine-related news flows, the fiscal plans and the reduction in
political risk, surprising us on the upside more than any rosy expectations, and
implying a tactical repositioning.
Macroeconomic forecasts (with information available as of December 31, 2020)
Real GDP growth (%) Inflation (CPI, yoy, %)
Annual
2020 2021 2022
averages (%) 2020 2021 2022
range
Developed countries -5.7/-5.3 3.7/4.5 2.8/3.4 0.7 1.3 1.6
US -3.7/-3.3 3.7/4.7 2.4/3.0 1.3 1.9 2.0
Japan -5.6/-5.0 2.3/2.9 1.3/1.9 0.0 0.1 0.2
Eurozone -7.6/-7.0 4.3/5.1 3.6/4.2 0.2 0.9 1.4
UK -11.5/-11.1 3.5/4.1 4.4/5.0 0.9 1.7 1.9
Emerging countries -2.9/-2.2 5.7/6.5 3.9/4.9 3.9 3.6 3.7
China 1.4/2.0 7.9/8.5 4.9/5.5 2.5 1.4 2.2
World -4.1/-3.5 4.9/5.7 3.5/4.3 2.6 2.7 2.8
Source: Amundi Research
Document for the exclusive attention of professional clients, investment services providers and any other professional of the financial industry -9
CROSS ASSET #01
INVESTMENT STRATEGY
Inflation: the elephant in the room the monetary authorities must balance
THIS MONTH’S TOPIC their policies more carefully in light of very
In 2021, inflation and inflationary
different inflation dynamics, and we expect
expectations are likely to be in the spotlight.
a stable monetary policy stance (a marginal
During the 4th quarter, inflation was a tightening in some cases only) on the back
relevant factor but not a market mover. of a gradual recovery later on.
US inflation was weak on key drivers such as
As a conclusion, we believe inflation in DM
shelter and medical services decelerating may experience unusual volatility in the
We are convinced considerably, while EU inflation remained months to come, due to lockdown-induced
in negative territory. We therefore feel it distortions and base effects, which should
that inflation next would be premature to assume that inflation reverse in 2021. As long as the output gap
year will trend higher expectations are anchored at higher levels. remains open, global and local deflationary
In general, we expect fiscal and monetary forces may put a lid on inflation, whilst the
and episodically spike policy coordination to continue, with fading negative drag from the oil base effect
mainly on base effects monetary policy facilitating fiscal should help inflation grind higher over next
expansion regardless of short-term 12 months together with vanishing base
inflation pressures. In fact, the major DM effects from VAT cuts, where implemented
central banks are revisiting as expected (e.g. Germany). In EM, the overall picture is
their longer-term policy guidelines after expected to remain benign, with headline
constantly missing their inflation targets inflation remaining within or close to the
and thus allowing for extended periods of CBs’ targets; however, price dynamics and
policy easing even in the case of modest expectations are worth monitoring, given
increase of inflation. In EM, by contrast, the huge dovish efforts made by most CBs.
Mapping US economic expectations.
Looking at Q4 2021, strong and above median growth does not lead to persistent inflation overheating, notwithstanding the monetary
policy support delivered so far. Quite the opposite, inflation moves towards the target but remains subdued.
3.2%
GDP US
-10.0% -8.0% -6.0% -4.0% -2.0% 0.0% 2.0% 4.0% 6.0% 8.0%
1.9%
CPI US
-3.0% -2.0% -1.0% 0.0% 1.0% 2.0% 3.0% 4.0% 5.0% 6.0% 7.0%
5.4%
M1 US
-10.0% -5.0% 0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% 35.0% 40.0%
Source: Amundi Global Research, Bloomberg, Eikon – Datastream, January 2020.
Methodology: The table represents each variable (e.g. GDP US YoY, CPI US YoY, US M1 acceleration) expected value in Q4 2021
(black triangle) compared to two ranges:
– light blue: the historical min and max values reached by the series over the sample period (starting 1988)
FAIR VALUE - US HY vs US EQUITY FAIR VALUE - EU HY vs EU EQUITY
– dark blue: the min and max values of the variable distribution conditioned to the estimated probability of each macro-
financial phase as computed in the AIP framework.
50% 50%
45%enables to evaluate how the forecasts position compared to45%
This the typical distribution of the expected financial regime as per
the40%
Advanced Investment Phazer 12 months ahead. 40%
35% 35%
30% II - R
ebalancing the probabilities
30% Our scenarios are contingent on the pace
25% of our scenario 25% of the massive vaccine rollouts, which
20% 20% we expect to be non-linear and uneven
As 2021 gets underway, we expect the
15% road to recovery to 15% remain bumpy, I
ncreasing the probability of our
10% shaped on the one hand 10% by waves of
central scenario to 75%
5% optimism linked to progress 5% in the mass
0% vaccination campaign and 0% on the other We have a higher conviction on our central
[< - [-40%; [-30%; [-20%; [-10%; [0%;hand
[10%; by
[20%;virus
[30%; containment
[> [< - [-40%;
measures, [-30%; scenario
[-20%; [-10%; and
[0%; we[10%; raise its probability
[20%; [30%; [>
40%] -30%] -20%] -10%] 0%] 10%]which 20% ] we30%]do40%] expect to be40%]
not 40%] lifted -30%] -20%] from
fully -10%] 65%
0%] to 10%]
75%.20%This
] 30%] 40%] 40%]
scenario assumes
SPX US HYbefore Q3. that getting
SXXP EU the
HY world back in order will
Source: Amundi Research, Bloomberg, Standard &We reviewed
Poor Website, Januarythe
2021, probability assigned
X axis reports portfolios be range,
expected return a multi-year
y axis reportsprocess,
the frequencywith
of the relapses in
probability distribution. to our central and alternative scenarios the real economy due to virus outbreaks,
in terms of expected financial regimes while policy intervention will be an option
compared to the previous quarter. to help speed things along.
10 - Document for the exclusive attention of professional clients, investment services providers and any other professional of the financial industry
EXPECTED RETURNS - DM Risky ptf vs GEM Risky ptfCROSS ASSET #01
INVESTMENT STRATEGY
According to our estimates, corporate 3) a prolonged economic downturn
THIS MONTH’S TOPIC earnings will prove resilient and rebound affecting business and consumer
from their 2020 lows as economic activity confidence and looping into sectors that
resumes. Managed low interest rates should have not yet been infiltrated by the crisis
further lift the equity markets, helping to (i.e. the financial sector) and causing the
maintain the remarkable gap that emerged exceptional economic crisis to evolve into
between the financial markets and the a financial crisis.
Q4 recovery path economy during 2020, sustained by
resolute policies.
T he upside risks with 10% probability
diverges across regions
We confirm our constructive medium-
as a new wave of Our upside scenario entails the health
term view of a continued and maturing
crisis being solved in H1 2021, confirming
infections prompts recovery, with more cautious optimism in
a sustained “vaccine- enabled” recovery.
the short term as far as financial markets
An orderly rebalancing of policy mixes with
lockdowns, partially are concerned.
a boost in economic activity would intiate
offsetting the sentiment Our optimism hinges on three key a virtuous path of economic recovery,
achievements of the 4th quarter: prompting productivity gains on new
boost provided by the 1) t angible progress in the Covid-19 digital/green developments, and a faster
earlier-than-expected vaccine front since November, leading normalisation. Private demand would
us to be more confident of a “vaccine- resurge, leading to a demand-led increase
start of the vaccination enabled” recovery, supported by of inflation albeit benign.
campaign 2) g radual progress on fiscal support Investment implications
allowing us to improve our economic Given the new probabilities of our central
projections 2 . We believe that fiscal and alternative scenario, we recommend
expenditure will have the highest impact well diversified portfolios, with balanced
by selectively addressing (welfare) risk exposures, which are resilient to rising
support in those sectors that have been volatility in the case of negative shocks
hardly hit by the health restrictions. All pertaining to growth or institutional
G4 central banks have further committed policies. We expect corporate earnings to
to maintaining accommodative financing rebound, underpinning even higher risky
conditions to stabilise the financial asset price levels in the context of interest
markets and monetise sovereign debt rates controlled by central banks. This
issuances to boost economic growth. should sustain the ongoing risk rotation
3) m ajor political risks (including US from Credit HY to value/cyclical equities
elections, hard Brexit) have disappeared and into EM assets.
and therefore reduced financial markets
volatility. I II - M
edium-term Investment
outlook
T he probability of the downside
scenario remains high at 15% Conveying our top-down assessment
into the Advanced Investment Phazer
Markets participants were a bit early in framework
pricing in a “vaccine enabled” economic
The risk rotation that We have described all the ingredients of our
recovery. Our downside risks, priced with
cycle indicator, the Advanced Investment
a probability rate of 15% (down from 25%),
began in Q4 20 should remain high and above the historical trend,
Phazer, which underpins our medium-term
continue over the Hence our cautiousness on the short-term investment views. Within this framework,
market moves. we bridge our views and expectations on
coming quarters the macro outlook to our convictions and
We see three main catalysts, which could investment strategy.
trigger our downside scenario:
We confirm the financial “recovery
1 ) a genetic evolution of the virus which regime” as a central scenario (with 75%
could drive the pandemic out of control prob.), with growth and macro determinants
again and lead to negative growth shocks. remaining paramount. On our economic
2)policy mistakes, such as execution radar, the softening seen in Q4 2020 should
risk of fiscal plans, or monetary policies not derail the 2021 rebound. Nevertheless,
being paused or seeing a correction in the convergence of economic growth to
part of their accommodative stance. The pre-crisis levels will be a slow and bumpy
Federal Reserve for instance could be path due to the serious structural damage
under pressure because of a free fall in caused by the pandemic to labour intensive
the USD, de-anchoring rates or inflation sectors.
expectations. The latter being consensus Our analysis based on long-term growth
trade, it represents a risk per se and might determinants shows that potential
play out as game changers in the scenarios. growth has been severely hit by the
2
his time, we explicitly added fiscal expenditure support (i.e. approx. USD500bn for the US with
T
effects in Q1 and Q2 mainly, computed in line with CBO fiscal multiplier estimates; for the Eurozone,
between 15% and 20% of the allocated RRF grants for each beneficiary country, with effects from Q3
mainly, estimated with multipliers in line with each DBP presented to the EU Commission).
Document for the exclusive attention of professional clients, investment services providers and any other professional of the financial industry - 11CROSS ASSET #01
INVESTMENT STRATEGY
pandemic via all three growth channels
E quities are the favourite pick within
THIS MONTH’S TOPIC (loss of productivity, lower capital risky assets
investment and diminished labour force
participation), effects that will be reversed The resilience of corporate earnings in the
only gradually over the medium term. context of managed interest rates should
However, corporate earnings should be help equities to hit new highs in 2021-22
more resilient and faster in recovering without assuming skyrocketing multiple
to pre-crisis levels (in the US, we levels.3.2%
We expect price-to-earnings ratios
GDP US to revert gradually to the historical median.
expect 2021 EPS to drift even higher than
-10.0% -8.0% -6.0% December -4.0% -2.0%More importantly,
2019 levels). 0.0% 2.0% from a risk
Therefore,4.0% return profile,
6.0% 8.0% the
asset price dynamics should not be equity market remains the favourite pick
a game changer for 1.9% CBs’ monetary within risky asset classes.
CPI US policies, and liquidity injections should Moreover, we expect the ongoing rotation
remain solid, underpinning asset reflation from Credit HY to equities, at least in
-3.0% -2.0% -1.0% and 0.0% preserving 1.0%positive2.0%
financing3.0%
and 4.0% 5.0% 6.0% 7.0%
developed markets, to continue. Although
financial conditions. the volatility of HY decreased significantly
Policy5.4% accelerators support risk in 2020, the potential upside from extremely
M1 US
assets, but the decoupling from their and artificially tight spread levels is more
-10.0% -5.0% 0.0% fundamentals
5.0% 10.0%increases
15.0% downside
20.0% limited than
25.0% in past recoveries.
30.0% 35.0% 40.0%
risks. This is reflected in the probability Q4 asset class rotation and the performance
Source: Amundi Global Research, Bloomberg, Eikonwe
– Datastream,
assignJanuary
to 2020.
the downside scenario of risky assets significantly reduced the
(15%), which includes a potential market market dislocation and the undervaluation
correction above 10% i.e. in line with in the laggards (global equities risk premium
historical average. vs. yield, cyclical assets, commodities and
in general all reflation trades).
S earch for yield and diversification
FAIR VALUE - US HY vs US EQUITY FAIR VALUE - EU HY vs EU EQUITY
Within this environment, the search for
R eality check on the continuation and
50% yield is still the dominant 50%
theme along the sustainability of the rotation
45% fixed-income spectrum: the 45% focus switches
According to our analysis, the rotation
40% however to emerging market 40% bonds, for
is sustainable over time. We recognise
35% diversification purposes 35%and expected higher potential in the Eurozone when
30% returns perspectives. In 30% fact, the mix of a
switching from HY to equities; the recent
weak US dollar, the time 25% premium adjusted
25% catch-up of this trade in the US has almost
income and the improving economic
20% 20% exhausted the relative appeal in the
conditions in the EM regions are tailwinds to
15% 15%
global emerging market bonds. Moreover, region. Investment opportunities in the
10% easing financial conditions 10% pioneered by GEM risky assets spectrum will continue
5% central banks are preventing 5% volatility to be available in 1H21.
0% spikes in GEM yield curves0% too. We reiterate In light of these considerations, we feel it
[< - [-40%; [-30%; [-20%; [-10%; [0%; our [< - [-40%;
[20%; [30%; for[> inflation linkers
[10%;preference over is appropriate
[-30%; [-20%; [-10%; [0%; to [10%;maintain
[20%; [30%;the [>rotation
40%] -30%] -20%] -10%] 0%] 10%] government
20% ] 30%] 40%] 40%] -30%] -20%] -10%]
40%] Inflation expectations
bonds. trade,0%] 10%] 20%
focusing ] 30%]
even more40%] on40%]lagging
are anchored at low levels, and this is asset classes and playing this theme at
SPX US HY SXXP EU HY
therefore a cheap hedge to have in case cross-asset level in order to guarantee
Source: Amundi Research, Bloomberg, Standard & Poor
theyWebsite,
moveJanuary
higher2021,
goingX axisforward.
reports portfolios expected return
therange, y axis
right reports
risk the frequency of the
diversification.
probability distribution.
In the recovery financial regime, our central case, Global Emerging risky assets (HY+Equities) outperform on
average Developed Markets risk assets mainly thanks to cheaper top down valuations.
1/ Expected returns - DM Risky portfolio vs GEM Risky portfolio
EXPECTED RETURNS - DM Risky ptf vs GEM Risky ptf
40%
35%
30%
25%
20%
15%
10%
5%
0%
[< -40%] [-40%; -30%] [-30%; -20%] [-20%; -10%] [-10%; 0%] [0%; 10%] [10%; 20% ] [20%; 30%] [30%; 40%] [> 40%]
DM Risky ptf GEM Risky ptf
Source: Amundi Research, Bloomberg, Standard & Poor Website, January 2021, X axis reports portfolios expected return range, y axis reports the frequency of the
probability distribution.
12 - Document for the exclusive attention of professional clients, investment services providers and any other professional of the financial industryCROSS ASSET #01
INVESTMENT STRATEGY
FAIR VALUE ‐ US HY vs US EQUITY
THIS
50% MONTH’S TOPIC
40%
In a cross asset portfolio, the rotation from HY to Equities case holds both in the Eurozone (EZ) and US.
30%
However, when considered regionally in relative
FAIR terms,
VALUE ‐ US HY vsthe
US EZ shows more upside.
EQUITY
20%
2/ Fair value - US HY vs US Equity
10%
50%
0%
[< -40%] [-40%; -30%] [-30%; -20%] [-20%; -10%]
[-10%; 0%] [0%; 10%] [10%; 20% ] [20%; 30%] [30%; 40%] [> 40%]
40%
SPX US HY
Source:
30% Amundi Research, Bloomberg, Standard & Poor Website, January 2021, X axis reports portfolios expected return range, y axis reports the frequency of the
probability distribution.
20%
10%
0%
[< -40%] [-40%; -30%] [-30%; -20%] [-20%; -10%]
[-10%; 0%] [0%; 10%] [10%; 20% ] [20%; 30%] [30%; 40%] [> 40%]
SPX US HY
Source: Amundi Research, Bloomberg, Standard & Poor Website, January 2021, X axis reports portfolios expected return range, y axis reports the frequency of the
probability distribution.
3/ Fair value - EU HY vs EU Equity FAIR VALUE ‐ EU HY vs EU EQUITY
50%
40%
30%
20%
FAIR VALUE ‐ EU HY vs EU EQUITY
10%
0%
50%
[< -40%] [-40%; -30%] [-30%; -20%] [-20%; -10%] [-10%; 0%] [0%; 10%] [10%; 20% ] [20%; 30%] [30%; 40%] [> 40%]
40% SXXP EU HY
30% Source: Amundi Research, Bloomberg, Standard & Poor Website, January 2021, X axis reports portfolios expected return range, y axis reports the frequency of the
probability distribution
20%
10%
Methodology: Expected returns (and fair values) forecast distributions based on scenario simulations generated from our
internal macro forecasts and the financial regime probabilities as resulting from our Advanced Investment Phazer. Simulated
0%
distributions capture[-40%;
[< -40%] asymmetries,
-30%] [-30%;upside and -10%]
-20%] [-20%; downside risks
[-10%; 0%] underlying
[0%; 10%] the[10%; central
20% ] scenario
[20%; 30%]for all asset
[30%; 40%] class[> universes
40%]
considered. In the last chart, we show two balanced portfolios (DM and GEM risky portfolios) based on 50% DM HY + 50%
DM Equities distribution and 50% GEM HY + 50% GEM equities SXXP distribution
EU HY respectively. Based on our calculation, portfolios
Source: Amundi Research, Bloomberg, Standard & Poor Website, January 2021, X axis reports portfolios expected return range, y axis reports the frequency of the
showing strong exposure to EM asset classes should outperform DM-based exposure.
probability distribution
Conclusion prolonged economic downturn affecting
business and consumer confidence, and
Q4 2020 confirmed the economic and (2) execution risks related to ambitious
financial cycle roundtrip while the 2021 fiscal stimulus plans.
financial recovery regime will ensure
further room for risky asset class Although a short-term market correction
rotation. We think the economic recovery is worth considering, according to our
will entail a gradual but uneven catch-up analyses, the risk rotation story remains
process. Relapses in the real economy will sustainable over the medium term. After
occur due to virus outbreaks, while policy the recent catch-up in the US, we expect
intervention should help speed things higher potential in the EZ when switching
along. In this environment, growth, rates, from Credit HY to equities. Investment
inflation, monetary and fiscal policies are opportunities should continue to be
strongly interconnected, which means an available in the Emerging Markets in the first
idiosyncratic risk can propagate a systemic half of 2021. In light of these considerations,
one, even if this remains confined to our we believe it is appropriate to maintain a
downside risk scenario. risk rotation focusing even more on lagging
asset classes and playing this theme at
The most relevant risks to our central cross-asset level in order to maintain the
scenario still relate to (1) the evolution of right portfolio diversification.
the pandemic in Q1 21, leading to further
negative growth shocks, increasing default
rates and bankruptcies as a result of Finalised on 06 January 2021
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