An even more balanced investment spread

Investment Policy, January 2021

An even more balanced investment spread

On the one hand, key economic data show a certain slowdown in economic growth. This reflects the impact of the second wave of Covid-19. On the other hand, we can expect to see more economic stimulus over the next few weeks and months, and whole swathes of the population are likely to gain access to vaccines in 2021. Financial markets look like they are heading into a so-called transition phase, in which we are likely to see additional frequent swings between more positive and less positive newsflow. Against this backdrop, an even more balanced investment policy appears the right response. We have therefore implemented an even more balanced investment spread as we enter the new investment year.

Key indicators point to the US economy losing some of its upward momentum. Month-on-month retail sales growth was just 0.5% for October, following 1.9% for the previous month. The Conference Board’s consumer confidence index declined more sharply than expected between October and November, namely from 101.4 to 96.1. There has also been a fall in US household incomes – having recorded a month-on-month increase of 0.7% in September; they then declined by the same percentage in October. These data show that US consumer spending, traditionally an important prop of the economy, is slowing. In Europe meanwhile, coronavirus is leaving its mark on economic data once again. However, a combination of the EU Recovery Fund and the expansion of quantitative easing by the European Central Bank (ECB) should ensure that Europe enjoys a powerful economic recovery in 2021, possibly outperforming the US.  

Equity markets have surged since the US elections and publication of positive test results for Covid-19 vaccines. For economically- sensitive sectors and regions, this has led to equity prices factoring in a continuing economic recovery, though not yet fully. The virus situation over the cold winter months could initially prove an obstacle. On the positive side, the valuation of Eurozone equities looks attractive when compared to the MSCI World Index. Moreover, we are expecting the ECB’s expansion of monetary easing and the implementation of the EU Recovery Fund to trigger a marked recovery of the European economy in 2021. In addition, the prospect of widespread vaccination could lead to switching of investment capital from government bonds to equities. This could well be to the benefit of Eurozone equities, which have underperformed their US counterparts in 2020. We have slightly reduced our weighting of low-volatility equities in favour of Eurozone equities. Overall, we will enter 2021 with an even more clearly balanced spread of investments.

Eurozone equities should benefit from a marked economic recovery in 2021.

Gérard Piasko, Chief Investment Officer

It has rather gone under the radar of the investment community that bonds have managed to keep pace with the majority of equity markets in 2020. Indeed, corporate bonds with an investment-grade rating, which have been our preferred segment since the first quarter of 2020, have actually recorded greater total returns than many equity markets. This shows that the diversification effect of bonds, so often dismissed as non-existent, does actually function in times of crisis. An obvious reason for the strength of the fixed-income market is the implementation of ever more clearly defined bond purchase programmes by the world’s major central banks. We are expecting these to be ramped up further, and are therefore persisting with our policy of overweighting investment-grade corporate bonds, which has served us so well this year. By contrast, following a sharp decline in yields, government bonds look a considerably less attractive investment proposition for the coming year than they did a year ago. We have therefore reduced our weighting of this segment.

Optimism over the efficacy of new vaccines to combat the proliferation of coronavirus has strengthened currencies dependent on economic growth – such as the euro, the Australian dollar, and the Brazilian real. By contrast, international investors have taken profits in the currencies traditionally designated as “safe havens”, namely the Swiss franc and the US dollar. In the short term, the euro looks somewhat overbought against both these currencies. This makes initial fluctuations of 3-5% in both directions more likely, before the rollout of new economic stimulus packages and vaccines lend support to the euro in 2021.

For commodities, the balance between demand and supply will be important over the next few months. Hopes of effective vaccines have recently stimulated demand for many commodities, but the supply situation remains crucial for this asset class. Where oil is concerned, the Organisation of the Petroleum Exporting Countries (OPEC) managed to stabilize prices in the second half of 2020 thanks to discipline on the production side. Oil-producing nations will now have to show further discipline (following only slight cuts to production recently) if the price of this commodity is to exhibit less volatility than the dramatic fluctuations witnessed in 2020.

The strong performance of gold, which has outperformed other commodities since the start of the year, has prompted a certain amount of profit-taking. We decided to take profits by reducing our weighting of this commodity when the price was close to its annual high. Nonetheless, gold remains a valuable diversification element in a portfolio over the medium to long term – as has been starkly apparent in 2020. 

Conclusion: Over the coming weeks and months – before vaccines are available to large sections of the population – positive newsflow could alternate continuously with less positive ones, resulting in a transition phase for financial markets. In our view, this makes an even more balanced spread of investments between asset classes the appropriate response. At the same time, we are retaining our clear focus on quality in both equities and bonds.

Gérard Piasko

Gérard Piasko

Gérard Piasko is CIO and head of the investment committee of private bank Maerki Baumann & Co. AG. Before he was for many years CIO of Julius Baer, Sal. Oppenheim and Deutsche Bank.

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Editorial deadline: 21 December 2020

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