Investment strategy 4th quarter 2020

The global economy is picking up much faster than expected.

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The recovery is on a firm footing

The global economy is picking up much faster than expected. The authorities responded quickly and decisively – in terms of both monetary policy and fiscal stimulus ­­– to soften the economic blow when a large part of the global population went into lockdown for close to two months. In most developed countries, both the manufacturing sector and retails sales have improved. China, the first country to be affected by the pandemic, will probably record slightly positive growth this year, while the USA and Europe should return to growth next year. Some sectors are, however, still struggling as a result of the public-health crisis. That’s especially true for services, and particularly tourism and the hotel and restaurant industry, which won’t return to normal anytime soon.

The world seems to be getting used to living with COVID-19. When social distancing and other hygiene measures aren’t working, targeted decisions to temporary limit people’s freedoms seem to be enough to contain the pandemic. And while the virus is still spreading, death rates have dropped sharply since the spring. Progress has also been made in how patients are treated as we wait for one or more vaccines to become available, which experts say should be in the first half of 2021.

Until then, central banks can keep their monetary policies extremely loose, although the question now is whether that will cause inflation to surge. That would, in turn, lead to a rise in interest rates on long-term bonds. Except for some inflation-linked bonds and lower-quality paper, bond markets offer only limited opportunities in this environment. Equities, however, should fare better ­– among major asset classes, they offer the best prospects. They may be slightly overpriced, especially in the US, but the global economic recovery should very quickly push corporate earnings back up.

Investor optimism reached record levels during the summer, so in early September we made the tactical decision to temporarily reduce our exposure to US equities. The correction recorded in recent weeks has dampened investors’ enthusiasm. We have therefore upped our exposure to US equities again in our investment grids, but we’re also keeping in mind that the US presidential election and the pandemic could make the markets more volatile in the short term. In terms of currencies, the US dollar began losing ground at the start of the summer, and this trend looks set to continue. The euro was initially buoyed by the dollar’s weakness, and now other, more exotic currencies could also rally. The Chinese yuan’s recent appreciation could set the stage for other emerging currencies to make some sustainable gains.

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