INVESTMENT PHILOSOPHY 1ST QUARTER 2021 - BCGE
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INVESTMENT STRATEGY
OF THE BCGE GROUP
INVESTMENT
PHILOSOPHY
1ST QUARTER 2021
Editorial
THE 4 KEY EVENTS IN 2020
The economist’s viewpoint
VATICINATION OR
VACCINATION FOR 2021?INVESTMENT STRATEGY
OF THE BCGE GROUP
CONSTANTINO CANCELA
Editorial BCGE Group Chief Investment Officer
2.
The 4 key events
in 2020
The year started as expected with no breakdowns or rebounds. The "central bank" fairy
But the sudden and widespread emergence of Covid-19 turned After the turmoil caused by the shutdown of the
everything upside down. Forgotten were the trade war between economy and the disruption of the markets which
the US and China or the horrors of a Brexit: we were expecting a suffered historic declines, central banks intervened
light comedy but it suddenly turned into a disaster movie. massively by injecting thousands of billions of dol-
lars in liquidity. This large-scale intervention had
Throughout the year, we reported on the brutal impact of the the effect of calming the markets. These extremely
pandemic: the paralysis of large parts of the economy, the way accommodative policies are here to stay. The low
different sectors were impacted, unprecedented events such as a interest rates that we had hoped would normalise
negative oil price. There is no need to go into more detail here. in 2021 will remain low for the foreseeable future.
Fortunately, from a strictly financial point of view, the disaster This is probably the driving force that fuelled the
movie has a "happy ending", with largely positive performances. recovery and the rise of the stock markets from the
end of March 2020.
We have started 2021 with a second wave as the virus is still very
much present. However, today we are better equipped to tackle
it. First of all, there is no longer the surprise effect. And I believe The "state" fairy
that the 4 key events of last year continue to reflect the events, For once, governments disregarded budgetary re-
like four good fairies in the cradle of a princess who is a little strictions and introduced massive aid measures
sleepy after the successive lockdowns. for businesses and individuals. This second driving
force fuelled the market recovery. Governments
took responsibility no matter what the cost. This
aid probably represents 10 to 15% of world GDP
and will most certainly continue in 2021. The new
US President has already announced his intention
to launch a new aid package for the United States.
The "vaccine" fairy
In mid-autumn we had a divine surprise: the results
announced for the future messenger RNA vaccines
were excellent. On the day of the announcement,
some stocks rose so dramatically that market partic-
ipants coined a new term: vaccine stock. Once the
euphoria of the announcements had died down, it
was time to await approvals from the various health
authorities and the first injections. Vaccination has
become a reality since the beginning of this year.
It will certainly be carried out at full speed in the
weeks and months to come. This third driving force
boosted the markets in November and December,
but it was not alone.EDITORIAL 2
INVESTMENT STRATEGY
The 4 key events in 2020
OF THE BCGE GROUP
THE ECONOMIST'S VIEWPOINT 4
Vaticination or vaccination for 2021?
MACRO OVERVIEW 6
TREND & SCENARIO
MARKET SUMMARY 7
ECONOMIC AND FINANCIAL OUTLOOK 8
Switzerland 9
Macroeconomic trend
Interest rates and exchange rates
Stock market
The "US election" fairy
The good news about vaccines was accompanied Eurozone 12
by the election of the Democratic candidate Joe Macroeconomic trend
Biden, who also won a narrow majority in the Interest rates and exchange rates
Senate while retaining the existing majority in the Stock market
House of Representatives. Despite the posturing
United States 15
of the loser, who unsuccessfully contested the
Macroeconomic trend
election, Biden's presidency did indeed begin in
Interest rates and exchange rates
January 2021. The inherited situation is dramatic
Stock market
domestically, particularly on the epidemic front.
One can only hope that more foresight and real-
Dynamic growth regions 18
ism will be implemented very quickly. A new ad-
Macroeconomic trend
ministration in the United States will undoubtedly
Bond debt
mean a new governance of international rela-
Stock market
tions, with a calming of the tensions experienced
under the Republican President.
PRIVATE EQUITY
The Brexit saga was concluded in extremis at the MARKET 21
end of the year, thus removing another disruptive
element. On the strength of these achievements,
we will continue to favour equities; we see some
momentum on the side of the global manufactur-
ing industry. Given the potential upheavals due to
the epidemic, selectivity remains at the core of our
management.INVESTMENT STRATEGY
OF THE BCGE GROUP
VALÉRIE LEMAIGRE
Chief Economist
The economist’s viewpoint
4.
Vaticination or
vaccination for 2021?
KEY POINTS
1. Unequal recovery: manufacturing at the heart of the recovery
2. Confidence and consumption in transition?
3. Bonds, foreign exchange and commodities, what is their relationship?
4. Diversification of solutions, not an oracle
When the time comes to make wishes, it would be a good omen sector, however, is an exception to this upturn. Production ca-
to accompany the vaccination by delivering a vaticination, syn- pacities will probably have to be adjusted to new requirements.
onymous with oracle or prophecy. However, the last quarter This hits France particularly hard, as this sector accounts for more
of 2020 was like the year of Covid-19, unpredictable and than 35% of its exports (30% of added value and 20% of em-
improvised. The return of the virus has plunged Europe and the ployment).
United States into the endless twilight of 2020. Preventive and
lockdown measures have been applied to varying degrees de- A recovery in world trade prospects and a resumption of produc-
pending on the region. There is no single and universal solution. tive investment by companies go hand in hand, even if uncertain-
Clearly, the impact of the crisis varies widely, and only the diver- ty continues to prevail at the beginning of the year, weighing on
sification of vaccine production and its widespread international individuals deprived of leisure and local social activities.
distribution will allow the twilight of 2020 to give way to the first
glimmers of dawn in 2021. On the economic front, the second The manufacturing sector, which was hit hard by the shutdown
wave has confirmed the large divergences and sector rotation last spring, is nevertheless doing well in this pandemic. Lower
seen since last March. For the time being, despite the restrictive financing costs, accelerated digitalisation, teleworking, reduced
measures imposed during the autumn, the manufacturing sector marketing and travel expenses, and falling commodity prices
is continuing to recover and is brightening the economic outlook. have highlighted the effects of revenue losses, albeit temporary,
for many manufacturing industries. Maintaining investments in
Economic normalisation in China and the depreciation of intellectual property, which are less subject to the ups and downs
the dollar did not wait for the verdict on the healthcare of the economic cycle and made possible by the drop in variable
situation to stimulate the manufacturing sector. While most costs, is a guarantee of stability and market dominance. More
countries experienced a deep recession in 2020, China ended than 35% of corporate investment in the US and the euro-
the year with growth of around 2.3% and started the year 2021 zone goes into R&D, while Switzerland is well ahead with
with strong growth, driven by construction and investment plans. more than 45%. There is no doubt that these commitments are
Demand from Asia and the depreciation of the dollar (by more a guarantee of resilience, not only for large companies but also
than 8% against the euro and 6% against all partner currencies) for medium and small companies which are strongly represented
are driving global trade in goods and the need for commodities. in Switzerland and Europe.
Business optimism is at its highest level since 2017, which is not
at odds with the US and Chinese export outlook. Admittedly, Uncertainty, however, will continue to exist as long as
pharmaceuticals and vaccine production will play a significant freedom and sociability are restricted and this weighs
role in global trade in the coming months. But other important heavily on the morale of private individuals. Confidence as
trade sectors are also driving global trade, such as commodities, measured by economic indicators is traditionally very dependent
including energy and key industrial metals for construction, or on the labour market. Budgetary, monetary and fiscal measures
semiconductors and high-tech goods. Lastly, the automotive in- have been implemented to limit the impact of the pandemic on
dustry is also gradually benefiting from the reorientation of its employment and to safeguard professional and financial income.
production towards achieving CO2 neutrality. The aeronautics Nevertheless, precautionary savings increased significantly, notbecause of restrictions on major purchases which recuperated markets, has been rewarded (record falls and rebounds
over the summer (cars, housing and consumer durables), but be- have followed one another). The year 2020 was a memorable
cause of restrictions on travel and social leisure activities. The in- year, with the sharpest monthly falls in history, but also the big-
dividual has favoured his home over travelling, in order to protect gest rises, with November suggesting that a sector rotation was
his health. The budget allocated to local services (restaurants, possible. The leadership of sectors focused on technological in-
INVESTMENT STRATEGY
hotels, leisure activities and travel) did not return to normal even novation, such as IT, digital communication, or biotech, has been
OF THE BCGE GROUP
after the lockdown was eased. Residential real estate has been confirmed and the major trends will continue this orientation in
the main beneficiary, with double-digit increases in house prices 2021. On the other hand, at the dawn of 2021, the diversifica-
since the beginning of the year, depending on the region, but tion in favour of high-quality companies, of medium and smaller
local services in cities are likely to suffer reductions in production sizes at the heart of industrial innovations, should allow invest-
capacity (capital and labour). Small SMEs and low-skilled la- ments to benefit from the economic recovery in the manufactur-
bour are mainly found in this sector, making it difficult to ing sector. As such, exposure to corporate capital is reinforced.
retrain the unemployed. Therefore, the public sector must be 5.
mobilised to limit the impact and respond to digitalisation accel- The Covid-19 crisis revealed that there are no lessons to be
erated by the crisis. learned in favour of a unique strategy. Different approach-
es and a trial and error approach to the very diverse effects
This context will understandably lead to an increase in spending were appropriate. The consequences of the health crisis are
by the authorities in all countries, but this will not necessarily not only physical or psychological, but also economic. Some sec-
lead to inflation, as some claim. Rising commodity prices, in- tors, as in other crises, will have to undergo drastic restructuring.
cluding oil, therefore do not point to worrying inflationary The health, economic, monetary and political authorities have
pressures, but rather to a welcome normalisation of mar- had a greater role to play during the crisis, and they are becom-
ket conditions. In this context, the return of inflation expecta- ing indispensable due to the inequalities deepened by the crisis:
tions close to regional targets has caused little disruption to bond generational, social, financial and medical.
markets since the stabilisation observed last summer. Unconven-
tional monetary and stable inflation policies thus make little dis- The time of vaticination for 2021 will come with widespread
tinction between interest rates according to maturity. Domestic vaccination!
and foreign prices (currencies) are definitely not a distinguishing
feature of the main regions and justify very similar monetary poli-
cies: ZIRPs (zero or negative rates) and repurchases of private and
public debt. Even the price differential for bonds of borrowers
with good and medium credit ratings has decreased.
Investors are turning their attention back to companies,
their debt and capital (listed or unlisted shares - private equity),
as well as their ability to generate profits, to position themselves
in thriving business sectors and to benefit from the recovery in
manufacturing. In addition to the industries that have been resil-
ient during the crisis, mainly the pharmaceutical and IT sectors,
there are the industrial sectors directly or indirectly involved in the
major trends accelerated by the crisis and the cyclical recovery of
global trade and corporate investment. However, the European
and Swiss industrial sectors offer potential that must be carefully
selected and require a thorough understanding of the business
model. More diversification in the quality of smaller companies in
these regions will help to consolidate and generate added value
from the real economy.
The year of extremes on the stock markets finally came to an
end with a very positive annual performance. Long-term in-
vestment, avoiding untimely entry and exit from the stock
MANUFACTURERS' OUTLOOK SURVEY SHARE OF INVESTMENT IN INTELLECTUAL PROPERTY
Response balances (% of total investment, excluding construction)
70 45
GROWTH
60
40
50
35
40
30
30
CONTRACTION
20 25
11 12 13 14 15 16 17 18 19 20 2017 2018 2019 2020
United States Eurozone China United States Germany Korea
Switzerland World Eurozone Switzerland JapanINVESTMENT STRATEGY
Macro overview:
OF THE BCGE GROUP
Trend and scenario
6.
GROWTH IN NATIONAL WEALTH (GDP)
Rebased indices
Recent developments 124
122
The rebound in economic activity on both sides of the Atlantic in 120
118
the third quarter was proportionate to the crisis in the first half 116
114
of the year. Due to the unequal economic impact of this health 112
crisis, some economies were better off than others at the end of
110
108
September. The situation differs on both the supply and demand
106
104
sides. The supply of personal services, such as recreational activi- 102
100
ties, has been extremely hard hit, while industry and construction 98
96
are less and less affected by the crisis. This is the opposite of 94
08 09 10 11 12 13 14 15 16 17 18 19 20 21
what was observed during recent recessions. Industry benefited
from support programmes at a time when precautionary meas- Switzerland Eurozone
ures were at their strictest and international trade had almost United States BCGE outlook
come to a halt. Since then, their activity has rebounded, to a
greater or lesser extent depending on the sector. Services were
also supported, but precautionary measures and consumer cau-
tion continue to limit their activity. As for prices, inflation stabi-
lised at very low levels in the autumn. Nevertheless, it will contin- CONSUMER PRICE INFLATION
ue to fluctuate sharply in the coming months, driven by statistical Annual variation in %
6
effects and the volatility of commodities, including energy.
INFLATION
4
Massive aid programmes are in place almost everywhere to
compensate for the inequalities created by the crisis. Loans and 2
employment subsidies in the form of unemployment benefit or
cash liquidity support low-skilled jobs and more fragile SMEs. 0
Rising unemployment and business failures will, however, occur DEFLATION
-2
to varying degrees in different regions. 2020 was characterised
by a severe breakdown in economic activity. Monetary and fiscal 00 01 02 03 4 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21
authorities have taken historic measures to support economic
United States Switzerland
operators and restore calm to the markets in response to an ex- Eurozone BCGE outlook
ternal crisis.
Outlook for 2021
The recovery will take shape in 2021, but it will not enable all
economies to return to their pre-crisis levels. As with the break- UNEMPLOYMENT RATE
down, there will be differences in the recovery. The manufactur- As a % of the working population
ing industry will benefit from the favourable outlook on export 16
markets, which will stimulate business investment, particularly 14
in research and development. The winners will be countries and 12
sectors exposed to exports of high value-added goods, free from
10
the constant and non-cyclical need to invest in intellectual prop-
8
erty. China will continue to lead the recovery and Switzerland
6
could return to its pre-crisis level as early as 2021, while the euro-
zone and the United States will struggle to bring all sectors back 4
to their pre-crisis levels. Despite the stabilisation of oil prices, in- 2
10 11 12 13 14 15 16 17 18 19 20 21
flation will remain volatile.
United States Switzerland
Eurozone BCGE outlookINVESTMENT STRATEGY
Market summary
OF THE BCGE GROUP
Previous 7.
Recent
ASSET ALLOCATION
Asset allocation continues to be determined by the creation of added value by companies
Equities Bonds Cash
through equities, more than by bonds.
Bond allocation is increasingly linked to the quality of the borrower, as long as monetary ++
policies reduce the value of time. Exposure to bonds no longer guarantees the preserva-
tion or stabilisation of capital.
+
The financial strength of companies is less severely tested than expected, as companies
have been able to preserve their margins. With the situation continuing to be mixed, it is -
all the more important to diversify in the rebound.
Increase the overweight position in equities, --
Maintain the underweight position in bonds.
Reduce the overweight position in cash.
EQUITIES
The profit outlook for 2021 is favourable. We continue to favour companies focused on CH EUROPE US EM
long-term themes, but thanks to the improved industrial outlook it is now also possible In %
100
to increase diversification and a rebalancing in favour of small and mid caps from the
industrial sector, which are more strongly represented in Europe and Switzerland.
75
Valuations, which are still high, will normalise with the integration of the profit outlook
for 2021. The valuation adjustment will be a source of volatility, but not a shock to share
50
prices. 43 41
31 32
25
16 16
10 11
Adjust regional exposure by increasing the cyclical weighting, 0
Favour megatrends and increase diversification by adding industrial S&M Caps. 100% basis
BONDS
Volatility has given way to stability but fixed income assets, even those considered to Short term 5 years Long term
be safe havens, have proved fragile. The close to 5-year maturity and the quality of the CHF EUR USD CHF EUR USD
bonds limit the sensitivity of the bond portfolio and the risk of capital loss.
++
Accommodative monetary policies together with massive injections of liquidity has
helped stabilise the money and bond markets, but low interest rates and loss of value
over time limit the potential. +
Bond risk needs to be closely managed as fundamental benchmarks have been deeply
-
and lastingly disrupted. Credit risk is favoured, especially as the price of risk has been
further reduced.
--
Maintain the 5-year maturity benchmark, which is less sensitive to price
fluctuations,
Maintain high quality bonds to limit corporate credit and liquidity risk.
CURRENCIES
Currency movements, initiated last summer and guided by fundamentals, continued. CHF EUR USD
The balance between trade and financial flows justifies a strong Swiss franc and a
weaker dollar, particularly against the Euro. In 2021, the impact of stimulus policies on ++
external positions and interest rates could however limit the depreciation of the dollar.
+
Volatility will remain high, dictated by the ups and downs of the virus and widespread
uncertainties, particularly linked to the political risks to which currencies are sensitive.
-
--INVESTMENT STRATEGY
Outlook
OF THE BCGE GROUP
8.
ECONOMY CURRENT OUTLOOK
2019 MOST RECENT DATA* 2020 2021
AUUNUALISED VARIABLE
% GDP SWITZERLAND 1.1 31.9 -2.9 3.2
EUROZONE 1.3 60.0 -6.9 3.9
UNITED STATES 2.2 33.4 -3.7 3.2
DYNAMIC GROWTH
REGIONS 4.7 N/A -3.0 6.0
% INFLATION SWITZERLAND 0.4 -0.8 -0.7 0.4
EUROZONE 1.2 -0.3 0.2 1.1
UNITED STATES 1.8 1.2 1.2 2.1
DYNAMIC GROWTH 4.1 N/A 5.0 4.7
REGIONS
MARKETS 31.12.2019 31.12.2020
3 MONTHS 12 MONTHS
VALUE DATE 2019 %* VALUE DATE YTD %*
% 3 MONTHS SWITZERLAND -0.69 0.03 -0.76 -0.08 -0.75 -0.75
INTEREST RATE
EUROZONE 0.00 0.00 0.00 0.00 0.00 0.00
UNITED STATES 1.75 -0.75 0.25 -1.50 0-0.25 0-0.25
% 10 YEAR SWITZERLAND -0.5 -0.3 -0.5 -0.1 -0.4 -0.1
INTEREST RATE
EUROZONE -0.2 -0.4 -0.6 -0.4 -0.3 0.0
UNITED STATES 1.9 -0.8 0.9 -1.0 1.3 1.1
EXCHANGE RATES USD/CHF 0.97 -1.4 0.89 -8.5 0.90 0.84
EUR/CHF 1.09 -3.5 1.08 -0.5 1.07 1.05
EUR/USD 1.12 -1.9 1.23 9.2 1.19 1.25
EQUITY INDICES SMI 10617 26.0 10704 0.8 10300 11000
STOXX 600 416 23.2 399 -4.0 390 430
S&P 500 3231 28.9 3756 16.3 3600 3850
MSCI EM 1115 15.4 1291 15.8 1220 1400
COMMODITIES CRUDE OIL 66 24.8 52 -21.7 45 55
GOLD 1521 18.7 1898 24.8 1950 2150
*For interest rates, values expressed as a differential over the periodINVESTMENT STRATEGY
Switzerland
OF THE BCGE GROUP
Macroeconomic trend
9.
SWITZERLAND: CONTRIBUTION TO GDP GROWTH (QUARTERLY) SWITZERLAND: EXPORTS
Quarterly variation in % Annual variation in % Balance of responses, standardised variable
8 30 80
6
20 70
4
10 60
2
0 0 50
-2
-10 40
-4
-20 30
-6
-8 -30 20
2015 2016 2017 2018 2019 2020 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
GDP growth Private consumption Exports by value
Business investment Inventory variations
Public consumption Net exports without gold Export orders (RH scale)
A strong economy, driven by manufacturing Consumer price inflation remained in deflationary territory
The rebound in Swiss GDP of more than 7% in the third quar- last autumn. Inflation will continue to be volatile in the coming
ter confirms Switzerland's resilience in this crisis. Three-quarters months, but control of the Swiss franc and the stabilisation of
of the cumulative decline in the first half of the year has been imported prices, particularly energy prices, will help the return
erased and, at the end of September, the Swiss economy was to inflation targets thanks to underlying forces. Accordingly, the
only 2% below its pre-crisis level. This resilience is mainly due to SNB intervened only modestly last autumn, particularly due to
the structure of the economy. Investment and exports, particu- the lack of pressure on the Swiss franc and external prices.
larly of high value-added goods, account for a major share of
GDP. Thus, business investment continues to play a leading role,
as does investment in intellectual property, which accounts for
nearly 45% of company expenditure excluding construction. It
enables the industry to take advantage of the upturn in inter-
national trade, notably to Asia where the normalisation of the
Chinese economy is being confirmed. The outlook for the manu-
facturing sector is therefore brightening, especially as companies
have been protected by the support measures implemented by
the Confederation and the cantons.
In addition, the second wave of Covid-19 is affecting the daily
lives of the Swiss more than the economy. The impact remains
limited to the sectors weakened by the restrictions. The recov-
MACROECONOMIC DATA: SWITZERLAND 2020 2021
ery should not be jeopardised, as the sectors in distress do not
weigh much in the Swiss economy, contrary to certain European % GDP -2.9 3.2
regions. Nevertheless, the morale of households, worried about % INFLATION -0.7 0.4
employment prospects and their health, remains fragile and the % UNEMPLOYMENT RATE 3.4 4.4
consequences on future consumption behaviour is uncertain, % KEY INTEREST RATE -0.75 -0.75
particularly in recreational and personal services. Unsurprising- % 10 YEAR INTEREST RATE -0.10 -0.10
ly, these permanently weakened sectors also suffer from the re-
USD/CHF 0.89 0.84
peated lockdown measures. Loss of unskilled jobs and bankrupt
SMEs are inevitable. Switzerland, with its industrial specialisa- EUR/CHF 1.08 1.05
tions, should benefit from a recovery that can enable it to return SMI INDEX 10704 11000
to the 2019 level by the end of 2021. EPS -6% 15%
PER 19.5 17.0INVESTMENT STRATEGY
Switzerland
OF THE BCGE GROUP
Interest rates and
exchange rates
10.
SWITZERLAND: INTEREST RATES SWITZERLAND: EXCHANGE RATES
In %
1.05
0.4 1.20
0.2 1.18
0.0 1.16 1.00
-0.2 1.14
-0.4 1.12 0.95
-0.6 1.10
-0.8 1.08 0.90
-1.0 1.06
-1.2 1.04 0.85
2016 2017 2018 2019 2020 2016 2017 2018 2019 2020
10-year Confederation Saron EUR/CHF
3-month LIBOR CHF USD/CHF (RH scale)
Short-term interest rates: getting lower and lower Swiss franc: erratic performance
The Swiss money markets were relatively stable over the last The dollar continued to dominate the scene last autumn, where-
quarter. After the sharp swings in the spring, short-term matur- as the EUR/CHF pair varied only slightly. The financial distortions
ities continued to decline, as was the case in the summer. Proof of March caused the dollar's appreciation to quickly fade away.
that lenders and investors are confident about the resilience of Over the last three months, the Swiss franc appreciated by almost
the Swiss economy, money market rates are now in line - or even 4%, resulting in an annual depreciation of the dollar against the
slightly below - the SNB's key interest rate (-0.75%). No change Swiss currency of almost 9%.
in monetary policy is expected. It should remain unchanged,
even in the event of a rebound in economic activity and inflation. And yet, despite the resilience of the Swiss economy, the Swiss
franc was only temporarily a safe haven in this crisis. The EUR/
Long-term interest rates: calm persists CHF relationship has remained stable in 2020, with the SNB's
Swiss long-term interest rates barely fluctuated last autumn, foreign exchange reserves inflated by value effects rather than
with little activity on investment-grade government bonds. In by massive interventions.
mid-November, the announcement of a vaccine triggered a rally
and a slight rebound in the Confederation's 10-year yield due to Last spring, the reduction in nominal interest rate differentials
a switch in securities. Nevertheless, there was still ample liquidity reduced the attractiveness of the dollar and returned it to its fun-
and limited volatility. The liquidity crisis at the end of March, driv- damentals of external trade imbalances. This movement contin-
en by uncertainty, gave way to a return to calm over the summer. ued in the 2nd and 3rd quarters due to the further deterioration of
The resilience of the Swiss economy and the absence of major in- the US current account balance. A context conducive to a further
flationary pressures thus allowed structural causes to determine depreciation of the dollar without it necessarily entering into an
Swiss government yields, which ended the year between 10 and irrevocable trend. The slight increase in long-term interest rates
20 bps below the level at the beginning of the year. They will re- in the United States no longer counterbalances this movement.
main persistently low and in negative territory. Indeed, structural As the dollar depreciates against the Euro and the Swiss curren-
changes (demographics, inflation and productivity) are a source cy, the Swiss franc should return to its slow path of appreciation
of downward pressure on interest rates, and more cyclical factors against the European currency.
(injection of liquidity, increase in debt, mechanical rebound in in-
flation), on the other hand, have little impact, generating hardly
any difference between the yields of the various maturities.
The price of risk on corporate bonds continued to fall. The cost
differential between AAA and BBB rated issuers returned to
pre-crisis levels. Investors, reassured by the vaccine announce-
ments and the improved economic outlook, regained a certain
taste for risk despite the general increase in debt. But this should
encourage caution, diversification and selection.INVESTMENT STRATEGY
Switzerland
OF THE BCGE GROUP
Stock market
11.
SWITZERLAND: STOCK MARKET INDICES SWITZERLAND: FUNDAMENTAL STOCK MARKET INDICATORS
Price index rebased to 100 = -5 years Price/earnings ratio Annual variation in %
150 19 20
140
18
15
130
17
120
10
110
16
100
5
15
90
80 14 0
2016 2017 2018 2019 2020 2016 2017 2018 2019 2020
SPI EXTRA P/E SMI
SMI IBES expected earnings growth (RH scale)
Encouraging signs of a rebound in 2021 Earnings expectations are reasonable
Despite the Covid-19 crisis, results were better than expected Earnings expectations have been revised slightly upwards from
on sales and especially margins, which were very well protected -9% to -8% for 2020 . We believe they are now at an acceptable
thanks to strict cost control. The resurgence in world trade and level. Expectations for 2021 are broadly achievable but the out-
the outlook for vaccination allow us to hope for a rebound in look for financials is a bit ambitious, based on a sharp steepening
economic activity in 2021. The automobile cycle finally seems to of the yield curve. We still prefer to limit exposure to this sector.
be seeing the light at the end of the tunnel and the first encour-
aging signs of improvement can be seen from Asia and more High valuations
particularly China. Semiconductors remain buoyant and the lat- Valuations are now above historical averages for the SPI (21.8X)
est comments are still optimistic for 2021. and still extremely high for small & mid caps (36.7X), under
pressure from 2020 earnings. Looking ahead to 2022 profits,
the stock market horizon in 2021, the Swiss market looks more
attractive and is trading at 17.3X, 24.2X for small & mid caps,
offering additional room for price increases.
THE ESSENTIALS
The resilience of the Swiss economy is confirmed. The persistence of the epidemic does not call into question the
recovery that could bring economic activity back to pre-crisis levels by the end of 2021.
Inflation, which remained in deflationary territory last autumn, will continue to be volatile in 2021.
Underlying and domestic forces will help the return to inflation targets.
Asset allocation remains focused on the creation of added value by companies. Due to the size of its companies and
their sector specialisation, the Swiss stock market offers a defensive growth bias: a shock absorber in the slump and
a catalyst in the rebound. The industrial orientation of Swiss companies will enable them to benefit from the rebound
in international trade.
Company results are better than expected. Margins were protected thanks to strict cost control. Profits are expected
to rebound in 2021 and in 2022 offering new gains.
Structural forces will dominate bonds: low interest rates and loss of time value will continue. Credit risk management
is of utmost importance in selecting high-quality companies.INVESTMENT STRATEGY
Eurozone
OF THE BCGE GROUP
Macroeconomic trend
12.
EUROZONE GDP EXPORT ORDERS
Index Q4 2020 = 100 Balance of responses, standardised variable
FULL ORDER BOOKS
105 2
100 1
0
95
-1
90
-2
85
-3
80 -4
EMPTY ORDER BOOKS
75 -5
2019 2020 2008 2010 2012 2014 2016 2018 2020
France Eurozone Spain Spain Germany
Germany Ireland Eurozone France
Industry at the heart of the recovery a special fund of EUR 750 billion and a reinforced budget until
The rebound in economic activity in the eurozone in the third 2027, the recovery plan promotes private investment and targets
quarter of 2020 was as impressive as the fall in the second quar- infrastructures working towards energy transition and digitalisa-
ter of 2020. Like France, the countries hardest hit by the first tion. All of this is designed to offer the manufacturing industry a
wave recorded the most dynamic growth. period of strong recovery from which the smaller specialised and
innovative structures will benefit.
Thus, at the end of September, economic activity in the eurozone
remained down 4.4% relative to pre-crisis levels. The second wave A generous monetary policy
of the epidemic and the adoption of new precautionary measures The ECB is committed to intervening as and when necessary to
will weigh on the creation of value in the fourth quarter, but the ensure the financial stability of the eurozone and to support the
impact should remain limited to the sectors in difficulty. economic recovery. For example, the extensive pandemic-related
programme put in place in the spring was further expanded in
Despite the hope provided by the start of vaccination campaigns, December (an additional EUR 500 billion - a total of EUR 1,850
household consumer spending and, above all, personal services billion) and will remain in place until 2022. The financing needs
will prove vulnerable to the virus' ups and downs in the coming (public and private) are significant and necessary for the recovery.
months and to fears about the outlook for the labour market. In addition, inflation is contained by the strength of the euro. A
Job-saving measures across Europe have helped cushion the im- statistical rebound is, nevertheless, expected in 2021.
pact of the crisis on jobs.
However, the worst-hit sectors - such as hotels and restaurants
or leisure - characterised by low-skilled jobs in small SMEs, will
have to cope with rising unemployment, bankruptcies and more
difficult re-training opportunities.
MACROECONOMIC DATA: EUROZONE 2020 2021
Manufacturing, on the other hand, has good prospects, with the % GDP -6.9 3.9
exception of the aeronautics sector. The rebound in international % INFLATION 0.3 1.1
trade supported by the dynamism of economic activity in Chi-
% UNEMPLOYMENT RATE 8.3 8.7
na and the depreciation of the dollar are fuelling the recovery
% KEY INTEREST RATE -0.50 -0.50
in industry. The trend towards consumer spending on durable
goods, particularly those related to housing, is associated with % 10 YEAR INTEREST RATE -0.30 0.00
this. Order books of European companies are growing rapidly, EUR/USD 1.23 1.25
providing a steady source of investment opportunities. Industrial STOXX 600 INDEX 399 430
companies and exporters of high value-added goods will thus be EPS -34% 35%
at the heart of the recovery, but beyond that, European industry
PER 16.6 14.5
will benefit from the ambitious European recovery plan. WithINVESTMENT STRATEGY
Eurozone
OF THE BCGE GROUP
Interest rates and
exchange rates
13.
EUROZONE: INTEREST RATES EUROZONE: EXCHANGE RATES
In %
1.0 1.6 1.00
1.5 0.95
0.5
0.90
1.4
0.85
0.0 1.3
0.80
1.2
0.75
-0.5
1.1 0.70
-1.0 1.0 0.65
2016 2017 2018 2019 2020 2016 2017 2018 2019 2020
10-year Bund EUR/USD
3-month Euribor USD/CHF (RH scale)
Short-term interest rates: dead calm Euro: improved reputation
Last autumn, money markets were not the focus of attention Last autumn, the EUR/USD exchange rate also continued the
and the lull observed in the summer turned into absolute calm. trend that began in the summer The appreciation of the Euro-
The resurgence of Covid-19, the new precautionary measures or pean currency against the dollar continued to exceed 1.21, its
the American elections did not cause any fluctuations. Thus, the highest level since April 2018. In 2020, the euro rose by 9.5%
3-month Euribor rate varied by only 5 basis points this quarter, against the dollar. The euro also continued to appreciate against
moving a little closer to its historic low. The massive interventions the pound sterling, although the rise was somewhat more ir-
of the ECB are producing their effects. Liquidity is abundant and regular. Uncertainty about the outcome of the Brexit has set the
cheap. The cost of financing between European banks should pace for the EUR/GBP pair.
thus remain permanently low, close to the ECB's overnight de-
posit rate of -0.5%. In this context, interest rates are expected to The appreciation of the euro brings the single currency closer
remain within the low range in which they already stand. to its fundamental value of 1.25 EUR/USD, supported by the
European trade surplus. The relative dynamics of trade flows in
Long-term interest rates: risk appetite favour of the appreciation of the euro against the dollar began
Like the money market, the bond markets remained quiet last after 2016 during the last phase of the previous economic cycle.
autumn. Despite falling temperatures, the market did not shiver Added to this, since last spring, the fall in nominal and real in-
and the development that began in the summer continued. Risk terest rates in the United States has reduced the attractiveness
premiums continued to fall steadily, for both government and of the dollar.
corporate bonds. The risk premium on Italian bonds is now close
to 1.1% after peaking at more than 2.8% in mid-March. The Nevertheless, both the commercial and financial attractiveness
same phenomenon is occurring on corporate bonds; the price of the eurozone could be hampered by the impacts of the cri-
differential between AAA and BBB European bonds has halved sis on Europe’s external position. Indeed, the surplus generated
and is now less than 0.5%. The massive interventions of the ECB by tourism could be permanently affected by new consumption
provide the market with sufficient liquidity and absorb not only behaviour, penalising the balance of services in many eurozone
the borrowing needs of governments but also of companies. countries, first and foremost Spain, Italy and France. All in all,
the current account surplus could be reduced for the whole zone
Lastly, the imminent introduction of Eurobonds is reassuring and the accumulation of currencies, a source of appreciation for
creditors and whetting their appetite for peripheral countries. the euro, could be reduced.
Rated AAA by the agencies and issued directly by the European
Commission, they will provide investors with bonds of the high- The upward pressure on the EUR/USD is fundamental and is ex-
est quality, reducing the financing costs of the most fragile coun- pected to continue. However, there is no indication of a more
tries in the eurozone and limiting their risk of default. This focus sustainable trend.
on the more fragile players is crucial at a time when banks are
restricting access to credit, particularly for small players (SMEs).INVESTMENT STRATEGY
Eurozone
OF THE BCGE GROUP
Stock market
14.
EUROZONE: STOCK MARKET INDICES EUROZONE: KEY STOCK MARKET INDICATORS
Price index rebased to 100 = -5 years Price/earnings ratio Annual variation in %
140 20 50
130 40
18
120
30
16
110
20
100
14
10
90
12
80 0
70 10 -10
2016 2017 2018 2019 2020 2016 2017 2018 2019 2020
STOXX 600 P/E STOXX 600
MSCI Small Cap Europe IBES expected earnings growth (RH scale)
Sector rotation less well oriented, with a forecasted increase of 30% for 2021.
After the fall in October, caused by the effects of the second Sales should be boosted in particular by business investment and
pandemic wave, the European equity markets took off in No- the strong rebound in the manufacturing and industrial sector,
vember supported by the renewed visibility linked to the election which is very well represented on the European market. The in-
of Joe Biden and the announcement of the imminent arrival of crease in the capacity utilisation rate will favour an improvement
a vaccine against Covid-19. The outlook for all, and particularly in margins.
for investors, was once again brighter than ever after the health
crisis. The anticipation of a recovery was then accompanied by Admittedly, the European market is trading at 17X 2020 profits,
a strong sector rotation in favour of the equities most affected a multiple higher than the historical average, revealing a valua-
during the health crisis; energy, banks and airlines rebounded tion gap between crisis-sensitive stocks (financials, oil, materials)
strongly, while the sectors that benefited during the lockdowns and defensive stocks (basic consumer goods, even IT), despite
(internet, health, agro-food distribution, etc.) progressed more the recent sector rotation. Diversification is becoming the watch-
timidly. word for the reorientation of our portfolios combining quality,
growth, value, small and mid caps.
Marked return to rising profits
Despite a gradual recovery of the economy, Europe is unlikely
to return to the 2019 level before 2022. Profits are neverthe-
THE ESSENTIALS
Economic activity rebounded strongly in the eurozone in the third quarter. However, the recovery process will not allow
the economy to return to pre-crisis levels in 2021. The European recovery plan, which focuses on the companies and
sectors of the future, will support investment.
Price inflation will continue to fluctuate but its evolution will be limited by the appreciation of the euro and the lack of
underlying labour market pressures. A statistical rebound is expected in 2021.
Allocation in Europe remains focused on the creation of added value by companies. The European recovery plan opens
up opportunities to participate in the megatrends. The industrial rebound will be favourable to Europe, with SME manu-
facturing strongly represented in its stock markets.
Despite a significant improvement in the profit outlook for 2021, corporate profitability is not expected to return to
pre-crisis levels until 2022, while high valuations conceal wide disparities.
The approach of selecting only high-quality credit also applies to the European market. ECB purchases and structural
forces will keep the yield curve at the lowest levels with little potential recovery.
The upward pressure on the euro brings it closer to its fundamental value based on the commercial and financial
attractiveness of the eurozone. The crisis is however interrupting this comparative advantage and limiting the direction
of appreciation.INVESTMENT STRATEGY
United States
OF THE BCGE GROUP
Macroeconomic trend
15.
UNITED STATES: INVESTMENT TRENDS UNITED STATES: CONSTRUCTION BOOMING
Rebased as at 1 January 2020 Annual change (%, adjusted) Index
110 40 100
105
20 80
100
0 60
95
90 -20 40
85
-40 20
80
75 -60 0
2015 2016 2017 2018 2019 2020 00 02 04 06 08 10 12 14 16 18 20
Total Intellectual property Housing starts Builders' confidence (1 year advance, RH scale)
Construction Building permits
Private investment will support the recovery Monetary policy, resolute
The recession in the first half of the year gave way to a strong The Fed is determined to intervene for as long and as much as
rebound in economic activity. Growth of more than 33% (an- necessary. In December, the Fed confirmed the continuation of
nualised rate) in the third quarter led to the US GDP being only its accommodative monetary policy, which will ensure sufficient
3.5% below its pre-crisis level. The election result reduced uncer- liquidity to finance the economy. However, despite fluctuations
tainties. The Senate will be dominated by the Democrats and Joe in inflation mainly associated with base effects, inflation should
Biden will be able to count on an experienced team. The speed remain under control. Without a return to full employment, up-
of the economic recovery in 2021 will depend on the implemen- ward pressures will not be dominant and sustainable. The recent
tation of support and recovery plans, but also on their size, as the relaxation of the 2% target broadens the interpretation of price
resurgence of Covid-19 and the slowdown in the job market are stability. Monetary interest rate policy is unlikely to change any
weighing on consumer morale. time soon, and the Fed will maintain its accommodative policy
for as long as necessary.
The resilience of investment in construction and intellectual
property in this crisis augurs well for a rebound in industrial ac-
tivity. Despite continued high unemployment, residential housing
starts are growing strongly.
Low mortgage rates stimulate demand whereas there is a short-
fall in housing availability. This is reflected in the fact that builder
confidence is at an all-time high. The result of this euphoria is
a strong demand for durable goods and building and housing
materials. This is evident by the recovery in the industrial met-
als trade and the resulting increase in prices. In addition, Joe MACROECONOMIC DATA: UNITED STATES 2020 2021
Biden's programme includes massive investments for the energy % GDP -3.7 3.2
transition that will boost the technological innovation sectors. % INFLATION 1.2 2.1
R&D spending will thus remain sustained and high value-added % UNEMPLOYMENT RATE 6.7 6.0
segments will see their growth intensify: greentech, smart cities,
% KEY INTEREST RATE 0.25 0.25
biotech, etc. While the United States is directly exposed to inno-
% 10 YEAR INTEREST RATE 0.92 1.10
vation, the share of manufacturing is being reduced in favour
of services, particularly those closely linked to consumption. The EUR/USD 1.23 1.25
uncertainty of the recovery therefore lies in this economic seg- S&P 500 INDEX 3756 3850
ment in 2021. EPS -15% 25%
PER 23.7 19.0INVESTMENT STRATEGY
United States
OF THE BCGE GROUP
Interest rates and
exchange rates
16.
UNITED STATES: INTEREST RATES UNITED STATES: EXCHANGE RATES
In % Index, JPY/USD
3.5 130 1.7
3.0
120 1.6
2.5
2.0
110 1.5
1.5
100 1.4
1.0
90 1.3
0.5
0.0 80 1.2
2016 2017 2018 2019 2020 2016 2017 2018 2019 2020
10-year Treasury bond Effective exchange rate, USD AUD/USD (RH scale)
3-month LIBOR USD JPY/USD
Short-term interest rates: nothing to report Dollar: continuing to fall, but for how long?
The US money market remained flat last autumn. Despite the The US dollar continued to depreciate last autumn, returning to
uncertainties around the elections and the sharp rise in Covid-19 its fundamental value. Since 1 October, the dollar has depreciat-
in the country, the US 3-month rate barely fluctuated. Liquidity ed by more than 4% against the euro, bringing its fall to nearly
remains abundant thanks to the Fed's intervention. Short-term 9% in 2020. The dollar is also under pressure against the other
interest rates which reflect monetary policy expectations are major currencies: yen, Australian dollar, Swiss franc, pound ster-
barely expected to move. ling and Chinese yuan.
Long-term interest rates: improved outlook? Nevertheless, the dollar retains its status as a safe haven against
Although there has been no major turbulence in longer matur- the currencies of dynamic growth economies, with the exception
ities, 10-year interest rates are however slowly rising. The me- of the yuan. The dollar index is limiting losses and is now more
dium-term economic outlook has been boosted by the arrival than 1% below its level at the beginning of the year.
of vaccines. In addition, inflation expectations have normalised
upwards, supported by the mechanical rebound in oil prices, The Fed's shift in monetary policy in the spring lowered bond
more than six months after they hit their lowest point. The Fed's yields across the Atlantic. The fall in interest rates, combined
continued asset buybacks should nonetheless limit this rise in with liquidity injections, has reduced the dollar's attractiveness,
interest rates. pushing it closer to its fundamental value of 1.25 against the
euro; a value also determined by the US foreign exchange posi-
On the corporate debt market, not all companies are in the same tion, which is in deficit. The dollar is gradually slipping, but its de-
boat. The normalisation of economic activity and liquidity injec- preciation is not a foregone conclusion. The impact of stimulus
tions have reduced risk premiums but they remain above the policies on external positions and interest rates could interrupt
lowest levels, particularly in the lower quality segments. There is the depreciation of the dollar in 2021.
a growing number of defaults on high yield bonds. The default
rate is now at its highest level for a decade. The relative weakness of the dollar will play a role in the global
economic recovery. It will support commodity prices (particularly
Stable short-term interest rates and slightly higher long-term oil) and the rebound in international trade.
interest rates mean a gently sloping yield curve (difference be-
tween long and short maturities), as in Europe and Switzerand, Industry, which is very sensitive to the evolution of exports, could
a consequence of unconventional monetary policies and stable also benefit, as could dynamic growth economies.
inflation expectations.INVESTMENT STRATEGY
United States
OF THE BCGE GROUP
Stock market
17.
UNITED STATES: STOCK MARKET INDICES UNITED STATES: KEY STOCK MARKET FACTORS
Price index rebased to 100 = -5 years Price/earnings ratio Annual variation in %
300 24 25
22 20
250
15
20
200
10
18
5
150
16
0
100
14 -5
50 12 -10
2016 2017 2018 2019 2020 2016 2017 2018 2019 2020
S&P 500 P/E S&P 500
Nasdaq IBES expected earnings growth (RH scale)
Towards a return to normalisation What to expect in 2021?
The last quarter of 2020 was highlighted by a series of good US companies have been able to preserve their profitability by
news: the announcement of a Covid-19 vaccine and the agree- adapting and restructuring. At the same time, they have con-
ment on the stimulus package in the United States. Investors, tinued to invest in IT. In this context, growth companies will
anticipating an upturn in activity in 2021, embraced this good continue to be at the heart of our selection. Nevertheless, the
news which led to the significant outperformance of companies improving industrial outlook will allow us to start a gradual repo-
that had been abandoned due to uncertainty and lack of visi- sitioning towards smaller-cap companies with a strong balance
bility. Thus, small-cap companies and cyclical industries (energy, sheet and a leading position in their respective industries. Cycli-
finance, consumer discretionary, etc.) achieved the best stock cal companies, which have benefited from the generous budget-
market performance during the last part of the year. Overall, the ary support during the Covid-19 period (such as defence indus-
US market ended the year up by more than 18%. But the com- tries), will have to be abandoned in favour of companies that will
ing months will not be calm, as volatility remains high, even if the benefit from the revival of world trade, such as the automotive
fundamentals are favourable. industry. True to our philosophy, this allocation remains a reflec-
tion of the real economy.
THE ESSENTIALS
After the sharp downturn in the first half of the year, the rebound was equally impressive. Budgetary and monetary
support helped to soften the impact. The new administration, capable of bringing people together across the divides,
will support the recovery and infrastructure.
Inflation remains under control, despite some volatility. The improved outlook and the statistical rebound expected
in spring 2021 should push it closer to the more flexible target. Monetary policy will continue to be accommodative,
resolutely geared towards the goal of full employment.
Asset allocation is in favour of corporate capital that creates added value, while bonds have lost their appeal.
The stock market ended the year on a strong upswing, thanks to the preponderance of large caps, particularly in the
technology and healthcare sectors. US companies managed to preserve their margins and their profit outlook is favourable.
We can now start to reposition our selection in favour of smaller, more cyclical, growth stocks.
The depreciation of the dollar, albeit justified, could ease. It will, however, support the improvement in the global
manufacturing environment.INVESTMENT STRATEGY
Dynamic growth regions
OF THE BCGE GROUP
Macroeconomic trend
18.
GDP OF DYNAMIC GROWTH COUNTRIES WORLD EXPORTS
Index Q4 2020 = 100 Annual variation in %
105 60
EXPANSION
100
40
95
20
90
0
85
-20
80
CONTRACTION
75 -40
2019 2020 11 12 13 14 15 16 17 18 19 20
China Brazil India Korea Vietnam
India Russia Brazil World China
Contrasts... Outlook
The dynamic growth region, like this crisis, is very diverse. In Asia The region's outlook remains under pressure from renewed out-
alone, the recovery trajectories between countries are very dif- breaks of the virus. Nevertheless, 2021 should see a strong re-
ferent. China is still the exception with positive growth in 2020, bound in economic activity. China will increase its influence in
while India is struggling to emerge from recession, with lock- the world economy and move closer to becoming the leading
down measures limiting Indian economic activity and depressing economic power, while the convergence of the other BRICS will
employment. The situation is also fragile in Russia and Brazil. be delayed. As with the rebound at the end of 2020, industry will
These differences can be explained by the duration and strength be at the heart of the economic recovery in 2021. Countries ex-
of the virus, but also by the structure of the economies. Econ- porting manufactured goods - especially high value-added goods
omies boosted by their manufacturing exports are doing well, - will benefit from favourable prospects for business investment
while countries dependent on their domestic markets are suffer- and exports.
ing. Despite the rebound in oil prices, energy-producing coun-
tries remain under pressure, with demand still outstripping sup- The Chinese Communist Party has communicated its 16th five-
ply. The agreement of the OPEC+ countries to limit the increase year plan. It promotes, among other things, the goals of national
in production did, however, help stabilise oil prices at the end of power, innovation and the development of renewable energy.
the year. Countries exporting iron ore are benefiting from the in- The gap with the Western economies is widening and the sign-
tensification of trade and the resumption of demand for metals. ing of the Regional Comprehensive Economic Partnership con-
firms the desire to strengthen regional trade. Signed by fifteen
Asian countries (the absence of India is notable but not necessar-
ily definitive), this free trade agreement concerns around 30% of
the world's population, trade and economic production. It will
play an important role in the future commercial balance of power
between the regions.
MACROECONOMIC DATA 2020 2021
DYNAMIC GROWTH REGIONS
% GDP -3.0 6.0
% GLOBAL TRADE -10.4 8.3
% INFLATION 5.0 4.7
MONETARY POLICY ACCOMMODATIVE ACCOMMODATIVE
MSCI EM INDEX 1109 1400
EPS -4% 20%
PER 19.2 16.5INVESTMENT STRATEGY
Dynamic growth regions
OF THE BCGE GROUP
Bond debt
19.
Pricing risk remains a challenge DYNAMIC GROWTH REGIONS: MONETARY POLICY
The risk premiums offered by emerging bond markets have con- Official interest rates in %
tinued to decline, despite some turbulence. The end of the US 25
elections and the prospect of a vaccine have reassured investors, 20
who are anticipating a rebound in economic activity. The new
administration has a more rational approach to international 15
and trade relations, and is expected to be more supportive of
10
international trade and emerging markets. In addition, although
monetary policies are historically accommodating in these coun- 5
tries as well, the search for yield is leading international investors
0
to reorient to emerging markets, particularly China. Neverthe- 2016 2017 2018 2019 2020
less, with the exception of Chinese bonds, investors continue to
Brazil Indonesia South Africa Turkey
favour dollar-denominated bonds. Indeed, emerging currencies China Russia India
under pressure have been in decline since the beginning of the
year. The exceptions can be explained by the structure of the
economies and the weight of industries, particularly high-tech DYNAMIC GROWTH REGIONS: CURRENCY AGAINST THE DOLLAR
industries, in certain countries. Variation in %, YTD
Indonesian Rupee 1.1%
Investors' appetite for emerging bonds, however, hides a more Chinese Yuan 1.0%
contrasted situation as a growing number of bond defaults are Turkish Lira 0.2%
observed in China, particularly of state-owned companies. These Indian Rupee 0.0%
defaults are occurring despite the normalisation of the finan- South African Rand -0.2%
cial situation in China, leading to a reduction in support pro- Argentinian Peso -0.6%
grammes. In reality, despite the increase, the level of defaults re- Russian Rouble -0.7%
mains low (around 1% of outstandings). The growing tolerance Brazilian Real -1.9%
of the Chinese authorities towards bond defaults - including by
-2.0 -1.5 -1.0 -0.5 0.0 0.5 1.0 1.5
state-owned companies - is an interesting development. It re-
duces moral uncertainty and reinforces the role of the market
to better assess the price of risk. However, it is difficult to rely
on the ratings issued by local rating agencies and the quality of
borrowers; financial transparency is still a challenge. EMERGING DOLLAR-DENOMINATED BONDS
Spread with 10-year US Treasury bond rate in %
In addition, both governments and companies are running up 12
more debt. This debt was already high before the crisis and its sus- 10
tainability will be a priority. Projects that generate future growth
8
and innovation are to be favoured as they could strengthen the
role of industry in the recovery and support high-quality debt. 6
4
5
0
2015 2016 2017 2018 2019 2020
Emerging Europe Latin America
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