Multi Asset Allocation Views - June 2020 - AXA IM Luxembourg
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Multi Asset Allocation
Views
June 2020
Multi-Asset Investment views
Our key messages and convictions
#1
Neutral on equites Global economy has near Positive on
collapsed in 1H20, but the
foundation for a 2H20
#2 Investment Grade
Unprecedented Credit
growth bounce is being laid support from both
fiscal and monetary
authorities should
help to ease
#3 valuation and
liquidity concerns
Fiscal policy on
one hand,
monetary policy
Neutral Sovereign
Bonds on the other hand #4
should contain Concerns over depth and
bond yields in the length of impact of COVID- Long Volatility
current range 19 virus on global growth
generates higher volatility
Source: AXA IM as at 20/05/2020
1
Asset allocation stance
Positioning across and within asset classes
Asset Allocation Equities Fixed Income
Key asset classes Govies
Developed
Equities Euro core
Euro area
Bonds Euro periph
UK
Commodities UK
Switzerland
Cash US
US
Inflation Break-even
Japan
US
Emerging & Equity Sectors
Euro
Emerging Markets
Credit
Europe Oil & Gas
Euro IG
Europe Telecoms
US IG
US Industrials Euro HY
US Cons. Discretionary US HY
EM Debt
EM Bonds HC
Legend Negative Neutral Positive Change ▲ Upgrade ▼ Downgrade
Source: AXA IM as at 20/05/2020
2
Central & alternative scenarios
Deep recession with little
ammunition 35%* Central scenario 55%* V-shape recovery 10%*
• Virus-shock fractures key labour markets • Coronavirus sparks severe recession in • Virus is contained quickly and growth sees
leading to significant global job losses most economies. Global growth forecasted “V-shaped” rebound
dampening demand even as virus fades. to fall to -2.8% in 2020. • Easier financial conditions (diminished
• Coronavirus outbreak more persistent • Central banks globally pushed beyond the trade, Brexit and political uncertainties)
• Scale of shock results in isolationist policies: envelope of their 2008 toolkits. Fed prove to be a tailwind for growth
trade wars and other geo-political tensions, backstopping most markets, ECB steps • Productivity growth accelerates,
echoing 1930s beyond limits dampening inflation pressures and
• Growth/inflation expectations weaken • Large fiscal easing in most economies. allowing central banks to maintain easy
further, a new depression threatens, Stimulus has focused on filling “the drop”. policy
corporates’ earnings under more pressure More likely necessary to build recovery • Global/US/EMU growth surprises to the
• Further monetary policy where space permits • Monetary and fiscal stimulus are sufficient. upside in a stronger and more persistent
(including China). Government’s continue Economic rebound depends on policy, rebound from Q2 dip
with fiscal stimulus and divide between labour market reaction and indebtedness. • ECB ends latest QE in 2020; Fed reverts to
monetary financing blurs further. As well as the virus itself. a patient upside bias beyond 2020
• Equities: Risk appetite continues to • Equities: earnings contraction priced so • Equities: equities rebound strongly,
deteriorates with equities continuing to far may be optimistic. Containment of mimicking the “V-shaped” rebound in
sell off pandemic a necessary condition for economic activity
• Safe haven government bonds rally rebound to be sustained • Government Bonds: US and EUR break-
resumes • Government bonds: in a range as central even rates rise
• Credit spreads to widen bank purchases offset massive fiscal policy • Credit: Spreads to rally
• EM debt to come under pressure • Credit: fundamentals at odd with recent
sharp reduction in spreads
*Probability for each scenario according to AXA IM as of 20/05/2020. Those expectations are provided for illustration purposes only. They are hypothesis based on data made public by official providers of
economic and market statistics. AXA Investment Managers Paris disclaims any and all liability relating to a decision based on or for reliance on this document
Change of the month: Upgrade Downgrade
3
Setting the scene: our global economic outlook
Economic contraction in 2020 with downside risk, AXA IM Research & Investment Strategy economic forecasts*
Unprecedented accommodative measures from Central Banks
Real GDP growth (%) 2018 2019* 2020* 2021*
• The US sets its own path with an easing of restrictions relatively sooner World 3.6 2.9 -2.8 6.3
than other countries. This should minimize the economic cost but carries
Advanced economies 2.3 1.7 -5.7 5.9
a relatively higher risk of a second wave of the virus. With the economy
US 2.9 2.3 -3.8 5.3
already re-opening, activity should rise sharply from a low base. We
Euro area 1.9 1.2 -7.0 6.2
forecast a contraction of -3.8% in 2020 and tentatively suggest +5.3% for
next year whilst stressing the uncertainty around specific forecasts UK 1.4 1.3 -8.7 8.0
Switzerland 2.5 0.9 -4.9 3.5
• Eurozone economic indicators have unsurprisingly shown a massive effect
from Covid-19 albeit with persistent and strong divergences between Japan 0.7 0.8 -5.8 3.3
countries, reflecting different economic structures, severity of lockdowns Emerging economies 4.4 3.7 -1.1 6.5
and implementation of exit strategies. The limited scope of the EU’s China 6.6 6.1 2.3 8.0
Pandemic Crisis support leads us to cut our forecast for 2020 to -7%
• China’s recovery continues thanks to supply normalization with a V-
shaped recovery in industrial production. However, sustainability of the
industrial recovery is questionable. More forceful policy easing is required
to offset growth headwinds. We maintain our 2.3% growth forecast for
2020, but acknowledge risks to the downside
• Emerging economic activity will suffer from the sharp falls in industrial
production and retail sales in the 1st quarter with deeper falls expected in
the 2nd quarter given the stringency of the lockdown measures. Central
banks have been very reactive with accommodative measures, but this will
not be sufficient to compensate for the contraction
• Major central banks implemented unprecedented accommodative policy
measures to counter virus related weakness and improve market
liquidity. The US Fed* keeps its rates to zero and continues to expand QE.
The ECB** also pursues its large QE programme. BoE*** also pursues a
large package of measures. The BoJ**** maintains its expanded QE
Source: AXA IM, Consensus Economics, IMF and Datastream as at 20/05/2020
*Federal Reserve ** European Central Bank, ****Bank of England, ****Bank of Japan
4
Overview of asset allocation stance
Our views: Investors remain cautious as interest rates stay low and
• As many parts of the world slowly deconfine investors are focused on the value stocks crushed
speed and pace of the recovery. It will have a profound impact on the way
various asset classes behave over the next couple of months. There is much
talk of a U shaped or a V shaped recovery. Despite the bounce in equities,
investors seem more positioned for the U as interest rates stay low, value
and cyclical stocks crushed and sentiment and positioning is bearish. There is
a good investment opportunity but timing is crucial.
• We maintain our medium-term constructive view on risky assets and credit
as the policy response to the pandemic is aggressive, but at this stage the
shape of the recovery is uncertain.
• The Covid 19 crisis has also put Governments under pressure and
accelerated to the surface any of the underlying global tensions. In an
election year, US-China recent truce could be seriously tested and Brexit was
on the sidelines but progress on negotiations is poor to say the least. The
resurgence of these various pressure points could again lead to bouts of
market volatility. However, we had constructive news in the Eurozone with
France and Germany’s 500 Bln Eurozone recovery fund proposal. Key asset classes
Our key convictions: Equities
• Positive on Credit –Unprecedented support from both fiscal and monetary Bonds
authorities should help to ease valuation and liquidity concerns
Commodities
• Neutral on equities - Global economy is set to collapse in 1H20, with massive
negative impact on earnings, but the foundation for a growth bounce in the Cash
2nd half is being laid
• Neutral duration on government bonds - monetary arsenal is a clear support Change ▲ Upgrade Downgrade
for bonds, but unparalleled fiscal stimulus and eventually unprecedented
supply should maintain government bond yields in the current range
Source: AXA IM, Bloomberg, 20/05/2020
5
Equity markets outlook and convictions
Our views: This is getting very extreme
• Equities range traded over the last month. Dire economic data no longer
seems to shock and investors focus is on the pace and strength of the
recovery. Is it U shaped, V shaped or L shaped ?
• Within our process we are now focusing on our high frequency indicators to
get insight on the timing and pace of the recovery. As the chart on the right
illustrates – shell shocked investors prefer to pay for quality visible growth
stocks (often found in the Technology sector) whilst value stocks (often found
in financial and cyclical sectors) are now trading at a huge discount. The
catalyst for a reduction in this spread would be a sign of improvement in our
indicators or even just less negative relative to expectations
• In terms of valuations – 2020 earnings are a write off and we look forward to
2021. Consensus expects anything between +15%/25% growth but until we
get a clearer idea of where 2020 growth settles it is still early days
• Sentiment and positioning are cautious. Cash levels are high and so good
news could see markets move fast Developed Emerging & sector diversification
• Our key convictions: Eurozone Emerging Markets
• We prefer a more neutral positioning. We are keeping a close eye on the UK EMU Banks
underperformance of value stocks as better news could trigger a partial Europe Oil & Gas
Switzerland
rerating here and investors are not positioned for that.
• US – Continues to benefit from higher weighting in Technology and Sweden Europe Telecom
Healthcare both winners from the COVID 19. US Industrial
US
• Eurozone – Inexpensive but high % of financials and energy both suffering
• Emerging Market Equities – Getting cheaper but hit by strong $ and for Japan US Cons. Discr.
many collapse in commodity prices.
• Switzerland – Benefits from higher exposure to staples and pharmaceuticals. Change ▲ Upgrade ▼ Downgrade
Source: AXA IM, Datastream as at 20/05/2020
6
Government and inflation-linked bonds outlook and convictions
Our views: UST’s show the depth of March panic not divesting per se
• Government bond markets have remained in a tight range for another
month despite concern that supply would pose a problem for valuations
and investor appetite with the Fed, in particular, having materially reduced
the rate of Treasury purchases of late. The chart to the right shows the huge
liquidation of UST’s in the panic part of the market sell off in risk assets. Yet
Japan in that month bought more UST’s than ever before. Long end UST’s are
now available at a currency hedged pick up to Japan and Euro Core long end
bonds which will attract further flow and continue to anchor long rates whilst
Central Banks will continue underpin demand this year. Neutral on duration
but appetite remains to buy on weakness as risks remain asymmetric for
yields in the coming months.
• Emerging markets bonds continue to suffer from perceived risk amongst
investors and are the only major fixed income asset class that is failing to
attract inflows. USD weakness would be a welcome support. Meanwhile the
asset class is probably unduly impacted and offers relatively attractive yields Govies Inflation Break-even
for those less impacted by mark-to-market considerations.
Euro core US
• Inflation breakeven pricing remain morose, close to levels seen with the
Euro periph Euro
initial recovery in risk assets at end of March. Currently no impending
catalyst for a sustained rebound. UK
Emerging
US
Our key convictions: Emerging Markets
• Government Bonds: Neutral whilst range set to be contained Japan
▼
• Inflation Breakevens: Positive on depressed valuations
Change ▲ Upgrade Downgrade
Source: AXA IM, Bloomberg as at 20/05/2020
7
Credit bonds outlook and convictions
Our views: Central Banks Drive Recovery in Returns
• Credit spreads have seen a further progress in their return recovery, chart
to the right, with the support of major Central Banks now extending to
‘Fallen Angels’, i.e. Investment Grade companies that were downgraded
to High Yield since the crisis. This trend of Central Bank intervention is
likely to continue further afield with notably the Bank Of England now
looking to extend its policy beyond the status quo in line with the ECB and
Fed. Credit markets are now an explicit rather than implicit tool of Central
Bank monetary policy.
• Credit markets have continued this month to benefit from large investor
inflows that have been met with unprecedented levels of issuer supply as
corporates bolster their liquidity levels. Whilst issuance has permitted a
higher degree of price discovery as new issues are priced and distributed,
the underlying secondary market is still suffering from poor liquidity in
general amidst limited risk appetite from financial intermediaries.
• Whilst valuations might be hard to justify with fundamentals so unclear and
default expectations below those in the Great Financial Crisis, the technical
support from CB’s and the improved sentiment that this affords investors
do, in our opinion, justify a positive appetite for IG credit risk. Credit
Euro IG
Our key convictions:
US IG
• Investment Grade: Overweight
• High Yield: Neutral Euro HY
US HY
Change ▲ Upgrade ▼ Downgrade
Source: AXA IM, Bloomberg as at 20/05/2020
8
Currency market outlook and convictions
Our views: USDJPY doomed to depreciate after FED massive easing
• USD: US economy is currently equally threatened by the impact of
lockdowns, putting an end to US growth exceptionalism. Massive FED
intervention brought liquidity back to normal. USD has lost all key supports,
including carry advantage. US administration is pushing to shorten the
lockdown period, leading to a higher risk of a second wave.
• EUR: German court decision on PSPP highlights the difficulty of delivering
fiscal union, questioning EUR viability. In the short term, this should not derail
ECB QE and EUR is holding up well, leaving timid chances for a comeback.
• JPY: Undervaluation even more acute as Central Banks ease against an
already constrained BoJ. The uncertain outlook and the lower foreign rates
differential should depress Japanese unhedged investment outflows, while
the stock is compelling to re-hedge in downturns, justifying safe haven status.
• GBP: UK government looks serious about not wanting to extend Brexit
transition. Market should reprice further the probability that UK exits with a Currencies
narrow or no deal as we approach June extension deadline.
USDEUR
• CAD : Double whammy of lockdown recession and damaged Oil Industry is a
serious threat for highly leveraged Canadian households. Production cuts and USDJPY ▼
restarting economies could continue to support the oil price rebound.
• AUD : Australia deployed a massive fiscal stimulus, against more limited EURGBP
monetary easing and more advanced pandemic recovery. Australia exports USDCAD
could benefit from further infrastructure spending from China.
Our key convictions: USDNOK
USDCHF
• We are positive on JPY versus USD with a constructive bias on EUR also ▼
against USD and on AUD versus CAD.
Change ▲ Upgrade ▼Downgrade
Source: AXA IM, Bloomberg as at 20/05/2020
9Commodity market outlook and convictions
Our views: Oil price rebound amidst supply cuts despite lower demand
• The impact of COVID-19 related containment measures on global
commodity demand is a major headwind for cyclical commodities.
Sentiment improved for oil and industrial metals and remained positive
for gold whist technical remain more neutral for gold, less negative for
industrial metals and Oil.
• The oil price rebounded from last month’s low following OPEC+
decision to cut production as well as the announcement of oil field
shut-ins as demand is expected to pick-up as lockdown restrictions
despite social distancing measures across the globe. Given the
production cuts are offset by the ongoing negative supply/demand
balance, we expect the oil price to remain at its current level until the
market shows sign of normalising.
• Industrials metals should benefit from the muted recovery in Chinese Commodities
demand which is likely to be offset by recovering production, following
Oil
the easing of labour restrictions at major mines.
Industrial Metals
• The gold price should continue to be anchored by low rates at fairly high
levels at $1700. In addition, gold continues to benefit from its safe haven Gold
status as investors pushed ETF holdings to record levels.
Our key convictions:
• We adopt a more neutral view on the commodity complex despite the Change ▲ Upgrade ▼ Downgrade
unprecedented negative demand/supply balance given the prospect of
reduced supply amidst an expected rebound in demand following the
easing of Covid-19 containment measures.
Source: Bloomberg , AXA IM 20/05/2020
10Volatility outlook and convictions
Our views:
Observed versus predicted equity volatility (US market)
• Houston, do we still have a problem? While the US Treasuries volatility curve
has normalised to pre-COVID-19 level and the FX market is stabilising in the
normal valuation range, equity volatility remains high with a VIX in the 30%
range. Our Equity Volatility Fair Value is close to current market level (cf. chart
on the right), mainly driven by the high level of stocks pairwise correlation. In
this context we should focus our attention on the US elections and the US China
relationship, a key element that might be a new catalyst.
• Regarding equity volatility, all major indices remain expensive with an inverted
term structure and a rather steep skew slope. Only Asian Markets exhibit
relatively interesting skew both on an absolute and relative basis.
• The FX market has normalised except for the GBP and the commodity
currencies. The Risk reversal are very heterogenous across currencies in terms
of valuation. However, the kurtosis pricing while decreasing remains high and
suggest FX market fragility.
Our key convictions:
• Begin the hedging of US election with mid-term maturity to benefit from
inverted volatility curve
• Rebuild volatility carry strategy with some beta protection overlay
• Relative Value has re-emerged with new entry point
Source: AXA IM, Bloomberg, as at 20/05/20
(1) Vo-Vol stands for implied volatility on VIX option contracts
11Important disclaimer This promotional document is designed for informational purposes. It does not constitute a contractual element, or investment advice. Due to its simplification, the information contained in this document is incomplete. It can be subjective and could change without notice. It is based on market information available at the time of preparing this document, market information that have not been verified or audited by AXA Investment Managers Paris or its affiliates (AXA IM). AXA IM is not required to update the information contained in this document, and do will not update it. This document is intended for institutional investors with a thorough knowledge of financial markets and investment techniques described in this document. The information contained in this document is based on elements of information, assumptions, projections, estimates, scenarios resulting from judgments and analytics which are by nature subjective. Therefore, given the subjective nature and purely indicative information contained in this document, AXA IM draws attention of this document’s recipient to the fact that the assumptions, projections, estimates and scenarios used by AXA IM to produce the information contained herein may be inaccurate and / or incomplete and AXA IM makes no warranty as to their future or as to their accuracy and relevance to the date of this document. AXA IM is not responsible for any omission in the information contained in this document. This document does not in any way constitute any commitment of AXA Investment Managers Paris to create, manage or distribute, or otherwise participate in the management or implementation of any financial instrument, portfolio investment whose performance is linked to the investment strategy described in this document. The recipient of this document remains the sole judge of whether an investment or divestment in financial instruments, funds or other investment vehicle whose performance is linked to the implementation of investment strategies described in this document. AXA Investment Managers Paris not grant any legal, tax or accounting and in no way will responsible for the legal, tax and accounting-related investment decisions implemented by the recipient of this document. The responsibility of AXA Investment Managers Paris, its employees, officers, representatives and advisers shall not be incurred by making investment decisions based on only the information contained in this document. An investment in any financial instrument must be based on a prospectus or any other legal document specifically describing the characteristics and risk factors, what does not provide this document. The recipient of this document will keep the information contained in it strictly confidential, so that information given and available to it, directly or indirectly, by AXA Investment Managers Paris. The recipient of this document shall use the information contained in this document only to determine its interest in the investment strategy described herein. Any reproduction, even partial, of this document is strictly prohibited. AXA Investment Managers Paris - “Coeur Defense" Tour B - La Défense 4 - 100, Esplanade du General de Gaulle - 92400 Courbevoie. Portfolio management company, holder of AMF approval n° GP 92008 dated April 7, 1992. Limited company with a capital of 1,384,380 euros registered in the Register of Commerce and Companies of Nanterre under number 353 534 506. 12
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