In a complex market environment, asset allocation will need to be increasingly “tactical” in 2020

11/12/2019

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In 2020, three major catalysts are expected to act on the financial markets - the slow deterioration of the economic situation, the maintenance of enterprising monetary policies by central banks and, finally, the persistence of global political risks. This environment gives cause to adopt an increasingly tactical approach to investment, where stock picking and stock diversification will remain indispensable.

  • The generalized erosion of economic growth – with an end to the expansionary stage of the business cycle considered probable in 2020 – constitutes an argument for keeping interest rates low. Additionally, it will probably dampen the prospects for the growth of corporate profits and equity markets in 2020.
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Without descending into prophesies of doom, our vision is relatively prudent. We consider that the consensus forecasts, predicting 10% growth in overall corporate profits for 2020, are overly optimistic. In fact, we anticipate that profit growth will stagnate, or even decline slightly, from 0 to -2%.

Gaëlle Malléjac
Active Management Investment Director

The second catalyst is that of the central banks, which will remain pre-emptive and enterprising in their monetary policies, in order to limit the impact of the economic slowdown. The American Federal Reserve is expected to reduce its key rates slightly in 2020, in line with a policy of “piloting” the slowdown in growth. For its part, the ECB will pursue its asset purchase policy, allowing the possibility of accelerating it if necessary. “The economic environment and the very accommodating monetary policies will maintain a downward pressure on interest rates,” says Gaëlle Malléjac

On the question of the persistence of political risks, in particular with regard to trade relations between China and the US, we must separate the currently observed short-term dialling down of the conflict from the medium to long-term strategic factors: although the signature of phase 1 of the accord seems to be on track, the US and China, in their quest for global leadership, will continue to confront each other on the technological and economic planes over the next few quarters.  in Europe, the Brexit negotiations currently in progress are expected to continue to generate numerous uncertainties, even though the hypothesis of the UK leaving with a deal is the most credible scenario.

 

Alertness to the factorial risk caused by correlations between asset classes

In view of these different factors, we must remain alert not only to the selectivity of the securities in our portfolios (stock-picking) but also to the sensitivity of asset allocation to factorial risk. “The resurgence of uncertainties can trigger very rapid alterations in the pattern of correlations between different asset classes, and so we must remain watchful to ensure that factorial risk – especially in equity – does not enter our portfolios. In a context of economic deterioration, 2020 will favour the quest for carry strategies and tactical positions,” predicts Gaëlle Malléjac.

In the fixed-income asset class, Groupama Asset Management is maintaining a neutral position in a market that is “regulated” by central banks. These banks are currently increasing their balance sheets, as illustrated by the ECB restarting its asset purchase programme. “The highly accommodating monetary policies will continue to be a supporting factor for the fixed-income markets in 2020″. American and European interests rates are expected to continue trending moderately downwards, but with a differential in the eurozone, where the movement could be slightly more marked for the “peripheral” rates, which are preferred by our management team in the sovereign debt compartment.

In the case of corporate bonds, the narrowing of risk premiums observed over the last few months is expected to end, albeit without giving way to any major increase in spreads. “We have not identified any major sources of tension for this asset class, and we favour the European investment-grade compartment, which is also supported by the ECB’s asset purchases. We also prefer the financial sector issuers having very satisfactory solvency ratios . The quality of the securities in our portfolios is our priority, and we position ourselves on long maturities in the A-rated bond segment and short and intermediate maturities for BBB-rated bonds,” adds Gaëlle Malléjac. The more volatile high-yield compartment and the bonds issued on emerging markets have to be evaluated by an essentially tactical approach. “In the high-yield segment, our preference is for BB-rated bonds compared to the B rating, in order to optimize volatility-corrected carry”.

 

Equity markets: looking for balance between cyclic and defensive approaches

Finally, given the less promising prospects worldwide for the stock markets, the Groupama Asset Class team has opted for slight under-exposure to equity in 2020. “The coming stage of the economic cycle offers a less favourable risk/reward ratio for this asset class”.

The team’s investment strategy aims to maintain a highly selective position, with a balance between cyclic and defensive securities, in line with different major stock market themes: for example, there is the theme of “long-term fundamentals”, reflected in companies that are well-positioned to profit from productivity gains and fiscal stimulus plans that focus on the infrastructure of energy transition, together with companies that are leaders in high-growth niche sectors (cloud, biotechnology etc.); another key theme is that of high-visibility defensive securities that are less cyclical and less sensitive to the risk of disruption (utilities, health etc.). A third investment theme is the universe of securities exposed to the emerging markets, in particular to Chinese consumers. “We are expecting equity markets to be relatively complex next year, with large swings between defensive and cyclical sensitivities. Stock-picking, stock diversification and active investment management will be more vital than ever,” comments Gaëlle Malléjac in conclusion.

  

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