Investment Prospects 2021: Confidence in “risky” assets allows Groupama Asset Management to reweigh the business cycle sensitivity of its portfolios

26/11/2020

Schermata 2020-06-12 alle 11.19.19

With a relatively strong cyclical effect of economic recovery, Groupama Asset Management is predicting a return to the growth levels prior to the health crisis, by September 2021 in North America and December 2022 in the euro zone.

Gaëlle MALLEJAC
[Gaëlle MALLEJAC, Directrice des Investissements]
The management team is maintaining its investment strategy prioritizing risky assets and the search for high returns. By taking a highly selective stock-picking approach, the aim is to adjust the weight of the global sensitivity of the portfolios to the business cycle.

 

With regard to fundamentals, the macroeconomic scenario adopted by Groupama Asset Management anticipates a significant recovery of growth in Europe as soon as the lockdowns are lifted and other health restrictions are eased. On the basis of powerful cyclical factors, this scenario predicts a return to pre-health-crisis growth levels by September 2021 in North America and December 2022 in the euro zone. “Until then, economies will continue to receive massive support from national fiscal stimulus plans, combined with monetary support from central banks,” says Gaëlle Malléjac, Active Management Investment Director at Groupama Asset Management.

 In this context, the sovereign and corporate debt markets are expected to be kept on a tight leash by central banks, and this should contribute to sustained downward pressure on interest rates. “The monetary policies of continued asset purchase programmes, together with long-term low interest rates and consequent declining yields have increased the attractiveness of “riskier” assets. These assets retain considerable potential for high relative-value returns.

 

2021: monetary policies will continue to act in support of risky asset classes

More precisely, the fixed-income markets seem to be caught in a vice between the prospects of a resurgence of the growth/inflation mix on one side and the proactive measures of the central banks on the other, at least until the end of 2022. “Bond yields are expected to remain relatively unchanged over the next twelve months, continuing to be held down to very low levels,” predicts Gaëlle Malléjac. In the corporate bonds segment, these trends are due to technical factors, such as the ECB’s asset purchases designed to support this asset class in Europe, and to fundamental factors, with a deterioration in corporate balance sheets in the context of the health crisis. In other words, companies have seen their profits tumble and their debts rise. This is expected to lead to a peak in default rates, which are expected to reach 8.4% in March 2021 globally, with 5.7% in Europe (compared to historic average rates of 4.1% and 3.5% respectively).

Nevertheless, the prospects for corporate bonds remain robust, thanks to the action of the central banks. In the case of the ECB, according to our estimates, the bank’s PEPP and CSPP* purchase programmes will represent an average of 10 billion euros of corporate debt per month. “The ECB’s asset purchase policy is very strong, especially on the European primary market, with an absorption of almost one third of the issues from the eligible corporate bond universe”. This catalyst explains the trend towards narrowing credit spreads, which are forecast to return to historic minimum levels.

 With regard to the stock markets, valuation levels are, on the whole, high in absolute terms. However, by comparison with other asset classes and risk-free rates, this asset class remains attractive. “We are maintaining a constructive reading of the equity markets, given their positive outlook over the medium term. We expect the stock markets to be lifted by the bounce-back effect of the early-cycle recovery phase and by the boost in household consumer spending as lockdown measures are eased,” explains Gaëlle Malléjac. For 2021, the United States seem to have a higher potential for an equity bounce-back than Europe, because “physical” economies (industrials and cyclicals, which are characteristic of the Old Continent) will be more sensitive to the overall recovery of national economies than is the case for “digital” economies (more characteristic of the United States).

 

Reweighting cyclical sensitivity by adopting a stock-picking approach

In view of this outlook, Groupama Asset Management is maintaining an investment strategy that prioritizes risky assets and the search for high returns. By taking a highly selective stock-picking approach, the management team aims to adjust the weighting of the overall sensitivity of its portfolios to the business cycle.

“On the corporate debt market, we are opting primarily for overexposure, with positive sensitivity to market beta. We are taking advantage of fluctuations in volatility to reinforce our exposure. In terms of stock picking, we are maintaining exposure both to the high-visibility sectors (Utilities/Telecoms) and to hybrid, corporate and financial debt, due to their attractive carry and the robust solvency of the selected issuers.

Additionally, we are now progressively repositioning our portfolios towards securities in the cyclical sectors (base industries, construction, energy and automotive) and in the sectors targeted by government stimulus plans,” continues Gaëlle Malléjac.

On the equity markets, the team selects securities benefiting from structurally favourable trends, in particular on the basis of innovation or niche growth. “We identify companies with high potential in the key sectors of innovation (IT, digital technology, hardware or 5G), health, biotechnology and infrastructure (utilities and capital goods), which will have a major role to play in the environmental and digital transitions and will receive support from stimulus plans”. The cyclicals that will be sensitive to the positive impact of the lifting of lockdown restrictions have also been reweighted in the portfolios since last summer. These cyclical stocks include, for example, European companies in the constructions, chemicals and automotive sectors that will benefit from the effect of the partial or total postponement of consumer spending by economic agents.

“Finally, we also identify opportunities on the securities exposed to the emerging markets, in particular the Asian and Chinese markets. We are targeting securities sensitive to consumer expectations (automotive, luxury and wines and spirits). Over the medium term, we are prioritizing companies having business models on the local or multi-local scale rather than the global scale. These securities will be less sensitive to supply chain risks and to the environmental challenges, and they will benefit from the return to regionalization of trade. This structural aspect will be increasingly decisive,” concludes Gaëlle Malléjac. 

 

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*PEPP: “Pandemic Emergency Purchase Programme”, / CSPP: “Corporate Sector Purchase Program” 

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