INVESTMENT STRATEGY NAVIGATOR - August 2020 - BNP ...
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INVESTMENT STRATEGY NAVIGATOR August 2020
Economic outlook at a glance
Financial markets at a glance
Fixed income at a glance
Forex at a glance
IN BRIEF Equities at a glance
Commodities at a glance
Alternative investments at a glance
Real Estate at a glance
2ECONOMIC OUTLOOK AT A GLANCE
KEY ECONOMIC VIEWS
Growth Inflation
BNP Paribas Forecasts BNP Paribas Forecasts
GDP Growth % 2019 2020 2021 CPI Inflation % 2019 2020 2021
United States 2,3 -6,6 5,8 United States 1,6 1,2 2,2
Japan 0,7 -5 2,1 Japan 0,5 -0,2 -0,2
United Kingdom 1.4 -8,8 5,4 United Kingdom 1,8 0,7 1,7
Eurozone 1.2 -9,2 5,8 Eurozone 1,2 0,2 1,2
Germany 0,6 -6 5,3 Germany 1,4 0,5 1,4
France 1,3 -11,1 5,9 France 1,3 0,3 1,3
Italy 0.2 -12,1 6,1 Italy 0,6 - -
Emerging Emerging
China 6,1 2,5 8,1 China 2.9 3,1 2
India* 6,1 2,7 5,2 India* 3 3,8 3,5
Brazil 1,1 -7 4 Brazil 3.7 2,5 3
Russia 1,3 -6,5 3,5 Russia 4,3 3,3 3,5
* Fiscal year * Fiscal year
Source: BNP Paribas 26.6.20 Source: BNP Paribas 26.6.20
MAIN MARKETS & FINANCIAL RISKS
Positive Risks (Equities) Negative risks
1. The key risk for economic growth is renewed 1. Renewed tensions between US and China and
lock-down period via a global second wave. At Brexit uncertainty.
the same time, markets are pricing a U shape 2. The virus comes back in waves and implies
scenario. Major progress on a vaccine and lower renewed lock-down periods.
mortality rates could bring a positive surprise 3. US elections and market fears regarding a shift
to the left of the democratic party.
4. Bigger negative effects on supply and potential
structural changes such as globalization
(corporates rethink their value chain models, a
trend towards nationalizations and/or a
permanent rise in saving ratios.
5. Political/Geopolitical risks remain elevated
around the world. A key risk of that type is
around the oil production and geopolitical
interests.
3FINANCIAL MARKETS AT A GLANCE
• Higher volatility should resurface, as high expectations require confirmations. High
valuations expose equity markets to bad news in coming months.
GLOBAL + • An opportunistic approach to strengthen pro-cyclical equity exposure. Downside risks are
limited by an improvement in the basis of comparisons (for activity, earnings growth…) as
we enter Q3. New highs are expected over the medium term.
• US outperformance to continue. The relative uptrend remains fully intact.
• Invest in Euro Area stocks: the likely adoption of a Recovery Fund in coming weeks liberates
EQUITIES
potential for a reduction in the risk premium.
+ MARKETS + •
•
Turning neutral on the UK market, due to Brexit uncertainties and absence of narrative.
Buy Emerging Markets: They are in a broad bottoming process versus developed market
indices. Asia (75% of the index) is our focus: we like China, Taiwan, South Korea, India and
Singapore.
• Positive on Materials and Insurance.
SECTORS + • We are positive on Healthcare except on Pharmaceuticals.
• In Europe: positive on Technology and Energy.
• We are negative on German govies, whatever the maturity, and on long-term US govies.
• We are positive on the front-end of the US yield curve for USD-based investors as short-
GOVIES -/= term yields have limited upside.
• We are positive on periphery debt (Portugal, Italy, Spain, Greece) on a buy on weakness
strategy.
• We prefer corporate bonds over government bonds.
BONDS
INVEST.
- GRADE
+ •
•
We like EUR and US IG bonds with a duration at benchmark (5 and 8 years, respectively).
We are positive on eurozone convertible bonds.
HIGH
YIELD
= • We are neutral on both US and eurozone HY.
• We are positive on EM local currency bonds, for both USD and EUR based investors, and
EMERGING +/= neutral on EM hard currency bonds (sovereigns and corporates).
AUD/USD
= • We think that the AUD and the NZD will hover around current levels short-term. Then, we
& see an upside potential respectively to 0.71 and 0.66 over the next 12 months.
NZD/USD
/
FOREX
USD/SGD
• We see the SGD and the MYR remaining steady short-term before appreciating over the next
& =
12 months.
USD/MYR
USD/INR = • We revised down our 3 and 12-month targets to 75
• OPEC+ output restrictions and declining US shale oil production together with the demand
OIL recovery should help reducing the crude stockpiles. We expect Brent prices to recover
+ around $45-55 in H2 2020 and to rise further in 2021
•
COMMOS
Real interest rates should remain extremely low for an extended period. Gold is seen as a
GOLD + refuge from ‘unfettered currency printing”. We revise upwards our expected trading range
+ •
to $1700/1900/oz for the coming 12 months.
Demand is slowly recovering with the reopening of the economies lead by China, the leading
BASE
METALS
+ buyer, thanks to infrastructure spending and other stimuli. Copper and Nickel are the more
promising metals.
•
REAL
= Positive for a ‘value-added’ commercial investment strategy, executed by first-class asset
ALTERNATIVES
ESTATE managers. Neutral on REITs with ‘long-only’ strategies, irrespective of geography.
/
Alt. UCITS / • Positive on Relative Value, Macro and Long-Short equity. Neutral on Event-Driven.
4FIXED INCOME AT A GLANCE
Both the Fed and the ECB adopted a “whatever
it takes” state of mind. We assume no change in
their policy rate for the foreseeable future.
While central banks remained very active, both
the Fed and the ECB have slightly reduced their
interventions -from high levels- as markets
have stabilised.
Given the extraordinary fiscal and monetary
response, plus the expected positive newsflow
for a treatment for the Covid, bond yields are
biased towards a move higher on a 12 months
horizon. We do not anticipate a surge though,
given the central banks’ purchases of
government bonds.
CENTRAL BANKS GOVERNMENT BONDS
• The Fed and the ECB are likely to keep rates on • Our targets are 1.25% for the 10-year
hold for the foreseeable future. Treasury yield and 0% for the Bund yield in
• We think that the ECB will increase the size of 12 months.
the PEPP in September, given its medium term • We stay positive on US short-term bonds for
downbeat inflation projections.
-- USD-based investors and negative for both
US long-term bonds and German bonds.
INVESTMENT GRADE (IG) PERIPHERAL & HIGH YIELD (HY)
• We are positive on both EU and US credit. We
prefer duration at benchmark (5 and 8 years, • We stay positive on periphery bonds with a
respectively). The Fed announced an buy on weakness strategy. We expect the
aggressive spread target. The supply/demand ECB purchases to continue and the size of
dynamic is supportive in the eurozone. the PEPP to be increased. The ECB makes
periphery bonds attractive by capping
spreads and suppressing interest rate
volatility.
EMERGING MARKETS BONDS
• We prefer to stay neutral on the whole HY
• We are neutral on EM bonds in hard currency.
= The medium-term is positive but the asset
class has already rallied.
bond index. We expect downgrades and
default risk to be more elevated for smaller
and HY companies. The selection of sound
issuers is key and bond pickers can take
• We stay positive on EM local bonds. We expect advantage of it.
stronger EM currencies and more easing of
monetary policies given record low inflation.
= - + Our position for this month
Evolution of our position from last month
5FOREX AT A GLANCE
The euro kept rallying early June against the greenback
supported by the positive market sentiment as well the Target three Target twelve
breakthrough on the European joint fiscal action. The Country Currency months months
euro broke 1,17. We expect a consolidation. Pair Trend Target Trend Target
United States EUR / USD Positive 1.14 Neutral 1.16
A g a i n s t e u ro
The pound remains weak. The fifth round of BREXIT United Kingdom EUR / GBP Neutral 0.90 Positive 0.88
negotiations is beginning. This round of talks will be Switzerland EUR / CHF Neutral 1.06 Neutral 1.09
crucial to reach an agreement before the end of the Japan EUR / JPY Positive 121 Neutral 123
year. The GBP should remain under pressure. Norway EUR / NOK Neutral 10.80 Positive 10.30
Japan USD / JPY Neutral 106 Neutral 106
Commodity currencies rallied against the weakening Canada USD / CAD Neutral 1.36 Neutral 1.34
A g ain st d o llar
Australia AUD / USD Negative 0.68 Neutral 0.71
US dollar, in particular the AUD and the NZD which
New Zealand NZD / USD Negative 0.64 Neutral 0.66
recorded the strongest performance in June. We see
Brazil USD / BRL Positive 5.00 Positive 4.50
the outlook remaining supportive for these currencies
Russia USD / RUB Positive 70.0 Positive 66.0
over the coming year. India USD / INR Neutral 75.0 Neutral 75.0
China USD / CNY Neutral 7.00 Positive 6.80
Source : BNP Paribas WM Currency forecasts
EUR/USD
• After the strong rally, there is a risk of a
consolidation. As markets will remain volatile,
we keep our cautious stance and now expect the
= EURUSD at 1.14 over the next 3 months. We
keep our 12-month outlook of 1.16.
EUR/GBP
• Brexit negotiations should linger until the
= autumn and keep the GBP volatile. We
maintain our 3-month target at 0.90.
• Near-term, we keep our view of a moderate
appreciation of the pound to 0.88.
AUD and NZD
• After recovering over the last two months, the
= AUD and NZD should make a pause.
• We keep convinced of a sustained strenth
over the coming year.
= - + Our position for this month
Evolution of our position from last month
6EQUITIES AT A GLANCE
Higher volatility should resurface, as high Earnings growth expectations for 2020 now seem reasonable. 2021
expectations require confirmations. High forecasts remain vulnerable
valuations expose equity markets to bad EPS growth
news in coming months. 20 (current year) 21 (next year) 12M fwd
MSCI AC World ‐18,7 28,4 2,8
MSCI Dev Mkts ‐20,7 28,5 1,6
An opportunistic approach to strengthen MSCI EM Mkts ‐6,7 28,0 9,6
pro-cyclical equity exposure. Downside S&P500 ‐22,9 29,7 0,8
risks are limited by an improvement in the TSX Comp ‐46,6 71,9 ‐1,8
basis of comparisons (for activity, earnings Euro Stoxx ‐30,5 38,3 ‐1,7
growth…) as we enter Q3. New highs are DAX ‐26,1 47,3 6,5
expected over the medium term. CAC ‐33,9 40,2 ‐3,9
MIB ‐49,7 55,7 ‐14,2
IBEX ‐49,4 63,8 ‐11,5
Our favourite markets are the US and the AEX ‐25,1 38,9 1,9
EU, followed by Emerging Markets. We FTSE100 ‐39,9 38,6 ‐10,1
turned neutral on the UK. SMI ‐6,6 15,5 3,8
Topix ‐26,8 7,0 13,6
ASX200 ‐14,7 ‐2,3 ‐0,4
Favoured sectors: Materials, Insurance. Source: IBES
GLOBAL EQUITIES DEVELOPED MARKETS
• An unprecedented gap between stock • US equity market: no end in sight for its
prices (up) and fundamentals (down) has outperformance.
opened up since the middle of March. • Invest in Euro area stocks. The likely
+ • Valuations are elevated. Over coming
months fundamentals need to confirm the
+ adoption of a Recovery Fund in coming
weeks liberates potential for a reduction in
high expectations. the risk premium.
• New highs lie in the medium-term horizon. • The UK market is downgraded to neutral.
EMERGING MARKETS INVESTING STYLE
• Buy emerging markets: against the rest of • Value should outperform. It has been a
the world, they are in a broad bottoming victim of the FAANGs popularity and the
phase. Their prospects rely essentially on continuous decline in yields. Given the
+ trends in Asia (75% of the index). This
space is well positioned for the future.
extreme in relative valuations, a global
recovery in earnings from Q3, an expected
• We like in particular China, Taiwan, South rise in yields and decline in the dollar,
Korea, India and Singapore. value is positioned to recover lost ground.
• SMID caps in the US and EU are likely to
SECTOR PREFERENCES capitalise on a second half recovery, not
Japan.
• Positive on Materials and Insurance.
• We are positive on Healthcare except on
Pharmaceuticals.
+ • Selective opportunities in Automobiles.
• In Europe: positive on Technology and
Energy.
• Avoid Consumer Staples.
= - + Our position for this month
Evolution of our position from last month
7COMMODITIES AT A GLANCE
Gold: After its strong rebound from March 19 low at
$1471/oz, gold broke $1900 late July.
Base metals: prices are bottoming out after
reaching their lows on March 23. Since then, the
prices increased at a moderate pace with copper,
Tin and Nickel leading and Aluminum lagging.
Oil: sinces their intra-day trough at $16 on April 22,
the Brent prices recovered up to $43 late July.
GOLD
Real interest rates should remain extremely
+ low for an extended period. Gold is seen as a
refuge from ‘unfettered currency printing”. We
revise upwards our expected trading range to
$1700/1900/oz for the coming 12 months.
BASE METALS
Demand is slowly recovering with the
reopening of the economies lead by China, the
+ leading buyer, thanks to infrastructure
spending and other stimuli. Copper and Nickel
are the more promising ones.
OIL
OPEC+ output restrictions and declining US
shale oil production together with the demand
+ recovery should help reducing the crude
stockpiles. We expect Brent prices to recover
around $45-55 in H2 2020 and to rise further in
2021ALTERNATIVE INVESTMENTS AT A GLANCE
• Macro managers, although flat at the index
level, gained from fixed income trading, with
steepeners in particular. Those managers
exposed to emerging markets even posted quite
strong performance as EM debt rallied
• Long/short managers gained as markets rallied,
Especially momentum and growth-oriented
sectors such as TMT and Healthcare did well.
• Relative value managers generally saw their
spreads narrow as market participants and
liquidity returned to those markets.
• We have a preference for Macro, Long-Short
and Relative Value strategies.
GLOBAL MACRO RELATIVE VALUE
We remain positive. After Central Banks and We are positive: The crisis will create clear
governments have injected a lot of money, credit survivors and losers to trade. Massive
+ Forex and fixed income markets should offer
trading opportunities.
+ issuance and downgrades create long/short
opportunities. Opportunities in convertible
bond arbitrage after large issuance and with
increased volatility.
LONG SHORT EQUITY
Positive opinion. The crisis will no doubt
create survivors and losers, offering attractive
long/short opportunities for fundamental stock
+ pickers.
EVENT DRIVEN
We are neutral: M&A spreads have rallied
significantly since March’s extremes even if they
=
remain 2 to 4% (annualized) above pre-crisis
level. But some deals carry more risk now that
some sector earnings have been crushed.
= - + Our position for this month
Evolution of our position from last month
9REAL ESTATE AT A GLANCE
There is a big discussion going on in the investor
world why REIT investors have not been protected
since the outbreak of the sanitary crisis. Some
REITs have reduced or temporarily postponed
dividend payments, which is triggering a
discussion about future cash flows.
However, investors should remain calm. A number
of REITs have already made up some of their
losses, and future cash flows may turn out far
better than everyone assumes. What is important
is that the current loan-to-value of REITs remains
moderate, even if the underlying portfolios would
decline in value ...
MATURE MARKETS
Neutral recommendation for European commercial 'core markets'. We believe that core commercial
= real estate is still an important part of any property portfolio. Peripheral property instead can be more
affected than prime property in times of crisis, especially in terms of value resilience. Nevertheless, net
rents are somehow under pressure, and moderate capital losses cannot be excluded either.
Positive for a “value-added” commercial investment strategy, as we believe that the Coronavirus will
lead to new investment opportunities (logistics, revival of retail assets etc.). As a matter of fact,
+ disruption and dislocation is resulting into widening discounts.
EMERGING MARKETS
What the current crisis teaches us is that there is little difference between the economically mature
markets and the emerging markets (EM). Most markets were expensive just before the crisis, while COVID-
19 has equally impacted all regions. The EM risk remains high though, given the EM currency movements
= against the US dollar. Consequently, the diversification potential has been reduced for investments outside
domestic markets. Fortunately, the monetary policy of the various EM central banks is helping the
recovery of real-estate markets, as nominal and real interest rates are also falling at present.
PROPERTY STOCKS
We remain neutral towards REITs with "long" strategies, regardless of geography. We know that it is
= difficult to remain neutral on REITs, but it cannot be the intention to sell at the current low prices. Retail
REITs should recover, although this process may take quite some time. Gross dividend yields are still
hovering above 3% in most regions, while interest rates are teetering at historically low levels.
= - + Our position for this month
Evolution of our position from last month
10Disclaimer
BNP Paribas Wealth Management Chief Investment Advisor (CIA) Network
Florent BRONES - Chief Investment Officer
Switzerland United States Asia
Roger KELLER, Chief Investment Advisor Wade BALLIET, Chief Investment Advisor Prashant BHAYANI
Chief Investment Officer
Belgium Luxembourg Grace TAM
Philippe GIJSELS, Chief Investment Advisor Guy ERTZ, Chief Investment Advisor Chief Investment Advisor
Xavier TIMMERMANS, Investment Strategy PRB Edouard DESBONNETS, Investment Advisor Fixed Income
Alain GERARD, Investment Advisor Equity
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