MAI views

Multi-Asset Investments Views - July 2020 - Back to work

Not for Retail distribution: this document is intended exclusively for Professional, Institutional, Qualified or Wholesale Investors / Clients, as defined by applicable local laws and regulation. Circulation must be restricted accordingly

Our key convictions:

  • Positive on Credit – unprecedented support from both fiscal and monetary authorities should help to ease valuation and liquidity concerns
  • Positive on equities - most countries have reopened on or ahead of schedule. As a result, economic data point to a faster and stronger initial recovery than initially thought while equity valuations are supported by unconditional monetary support
  • Neutral duration on government bonds - monetary arsenal is a clear support for bonds, but unparalleled fiscal stimulus and eventually unprecedented supply should maintain government bond yields in the current range

Our positioning:

  • Positive on Credit
  • Positive equities
  • Positive commodities
  • Neutral duration in our government bonds exposure
  • Long equity call options delta hedged to protect the portfolios where possible

Our views

The major drivers for risk assets currently are positive economic surprises, a backdrop of easy money/ loose monetary conditions, and high cash balances/ low positioning. All of these factors are now supportive and as a result we decided earlier this month to upgrade equities and commodities to overweight in our portfolios.

Since we published our Multi-Asset Investment Views last month, most countries have reopened on or ahead of schedule, particularly in the US and this reopening process is gaining momentum. As a result, economic data in the US points to a faster and stronger initial recovery than initially thought which creates possible upside risks to the consensus growth forecasts. The strength of the recovery in the labor market surprised across the board as the latest US jobs report showed a fall in the official unemployment rate to 13.3% (a 3.2% decline from 16.3% when correcting for misclassifications), far below the consensus 19.0%, suggesting that the jobless peak has already passed. On the back of this positive jobs report, May retail sales jumped 17.7% MoM, leaving retail spending down only -6.1%YoY in May relative to -19.9% in April - strengthening the idea that government income substitution, along with a large share of job loss being temporary, would allow for a strong bounce-back in spending. While history will judge if it is wise to replace 1 dollar lost by households with more than 2 dollars from the government, part of this money is likely to be spent at some stage as the saving rate should come down from an unsustainable 33% level. Unless data surprises move negative or economic data momentum fails to turn higher over the next three to four weeks, risk sentiment is likely to remain constructive.

Of course, many service sectors are likely to remain impaired for some time. Restaurants, retail stores, hotels, movie theaters and airlines won’t return to full capacity quickly. However, these sectors are significantly under-represented in US equity indices like the S&P500 which, on the contrary, is heavily skewed toward the technology (27% of the index market capitalization), Healthcare (14%), Consumer Staples (7%), retailing (8%) and Utilities (3%) sectors. Taken together, these sectors account for 60% of the S&P500 market capitalization and are amongst the least impacted by the lockdown, with limited expected impact on their earnings this year. This is the reason why we think earnings per share are likely to be back to their pre-crisis level before US GDP, around Q2 2021 versus Q3 2021 for GDP. At that time, equity valuations could well be higher than their pre-crisis level given the unconditional support of monetary policy and the resulting decline in the equity discount rate. If you add the relatively light positioning, the path of least resistance seems to be up for equities.

Of course, faster reopening also means rising risks. An up-move in COVID-19 infections in some US states triggered anxieties about a second wave and corrections in some markets earlier this month. However, having favored public health over the economy in March/April, policymakers’ preferences have changed. The threshold for reversing the reopening is a lot higher than the threshold for the original shutdown. The question is about tolerance level, which will vary by state and country as a function of treatment capacity. Officials are likely to treat second waves with just local lockdowns and economic consequences should therefore not be large enough at this stage to justify a defensive investment strategy. We are obviously following developments very closely and are prepared to adjust our stance if necessary.  

On the political front, US equities have continued their march higher despite Joe Biden gaining in the polls. We don’t think that this is an immediate macro mover but certainly one to watch heading into Q3 as Joe Biden has proposed reversing half of the Trump tax cut. Using the 2017-18 experience as a guide, if implemented immediately after the elections - which supposes Biden wins with Democrats taking both houses of Congress - this would shave roughly 5% off 2021 EPS of S&P500 companies which could act as a catalyst for stocks to decline. As of now, we are less concerned given our confidence that other Democratic policies could remain supportive of the economy (e.g. House Democrats unveiled a 1.5 trillion USD infrastructure package), and the limited downside to profits from a half reversal.

After having massively surprised on the downside, economic data are now significantly surprising on the upside

Not for Retail distribution: This document is intended exclusively for Professional, Institutional, Qualified or Wholesale Clients / Investors only, as defined by applicable local laws and regulation. Circulation must be restricted accordingly.

Past performance is not a guide to current or future performance, and any performance or return data displayed does not take into account commissions and costs incurred when issuing or redeeming units. The value of investments, and the income from them, can fall as well as rise and investors may not get back the amount originally invested. Exchange-rate fluctuations may also affect the value of their investment.  Due to this and the initial charge that is usually made, an investment is not usually suitable as a short term holding.

This document is for informational purposes only and does not constitute investment research or financial analysis relating to transactions in financial instruments as per MIF Directive (2014/65/EU), nor does it constitute on the part of AXA Investment Managers or its affiliated companies an offer to buy or sell any investments, products or services, and should not be considered as solicitation or investment, legal or tax advice, a recommendation for an investment strategy or a personalized recommendation to buy or sell securities. The strategies discussed in this document may not be available in your jurisdiction.

Due to its simplification, this document is partial and opinions, estimates and forecasts herein are subjective and subject to change without notice. There is no guarantee forecasts made will come to pass. Data, figures, declarations, analysis, predictions and other information in this document is provided based on our state of knowledge at the time of creation of this document. Whilst every care is taken, no representation or warranty (including liability towards third parties), express or implied, is made as to the accuracy, reliability or completeness of the information contained herein. Reliance upon information in this material is at the sole discretion of the recipient. This material does not contain sufficient information to support an investment decision.

Issued in the UK by AXA Investment Managers UK Limited, which is authorised and regulated by the Financial Conduct Authority in the UK. Registered in England and Wales No: 01431068. Registered Office: 7 Newgate Street, London EC1A 7NX. In other jurisdictions, this document is issued by AXA Investment Managers SA’s affiliates in those countries

Issued by AXA INVESTMENT MANAGERS PARIS, a company incorporated under the laws of France, having its registered office located at Tour Majunga, 6 place de la Pyramide, 92800 Puteaux, registered with the Nanterre Trade and Companies Register under number 353 534 506, and a Portfolio Management Company, holder of AMF approval no. GP 92-08, issued on 7 April 1992. In other jurisdictions, this document is issued by AXA Investment Managers SA’s affiliates in those countries.

In Hong Kong, this document is issued by AXA Investment Managers Asia Limited (SFC License No. AAP809), which is authorized and regulated by Securities and Futures Commission. This document is to be used only by persons defined as “professional investor” under Part 1 of Schedule 1 to the Securities and Futures Ordinance (SFO) and other regulations, rules, guidelines or circulars which reference “professional investor” as defined under Part 1 of Schedule 1 to the SFO. This document must not be relied upon by retail investors. Circulation must be restricted accordingly.

In Singapore, this document is issued by AXA Investment Managers Asia (Singapore) Ltd. (Registration No. 199001714W) and is intended for the use of Institutional Investors only as defined in Section 4A of the Securities and Futures Act (Cap. 289) and must not be relied upon by retail investors. Circulation must be restricted accordingly

For Japanese clients: AXA Investment Managers Japan Ltd., whose registered office and principal place of business is at NBF Platinum Tower 14F 1-17-3 Shirokane, Minato-ku, Tokyo 108-0072, Japan, which is registered with the Financial Services Agency of Japan under the number KANTOZAIMUKYOKUCHO (KINSHO) 16, and is a member of Japan Securities Dealers Association, Type II Financial Instrument Firms Association, Investment Trust Association of Japan and Japan Investment Advisors Association to carry out the regulated activity of Financial Instrument Business under the Financial Instrument Exchange Law of Japan. In Japan, none of the funds mentioned in this document are registered under the Financial Instrument Exchange Law of Japan or Act on Investment Trusts and Investment Corporations. This document is purely for the information purpose for use by Qualified Institutional Investors defined by the Financial Instrument Exchange Law of Japan.

In Taiwan, this document is issued by AXA Investment Managers Asia Limited (SFC License No. AAP809), which is authorized and regulated by Securities and Futures Commission. This document and the information contained herein are intended for the use of professional or institutional investors and should not be relied upon by retail investors. They have been prepared and issued for private informational and educational purposes only at the sole request of the specified recipients, and not intended for general circulation. They are strictly confidential, and must not be reproduced, circulated, distributed, redistributed or otherwise used, in whole or in part, in any way without the prior written consent of AXA IM Asia. They are not intended for distribution to any persons or in any jurisdictions for which it is prohibited.

For Malaysian investors: As the recognition by the Malaysian Securities Commission pursuant to Section 212 of the Malaysian Capital Markets and Services Act 2007 has not been / will not be obtained nor will this document be lodged or registered with the Malaysian Securities Commission, the shares referred to hereunder (if any) are not being and will not be deemed to be issued, made available, offered for subscription or purchase in Malaysia and neither this document nor any other document or other material in connection therewith should be distributed, caused to be distributed or circulated in Malaysia.

For Thailand investors: Nothing in this document shall constitute in any manner whatsoever a proposal to make available, offer for subscription or purchase or to issue an invitation to purchase or subscribe for any securities in Thailand or a proposal to implement any of the foregoing in Thailand nor has this document been approved by or registered with the Securities and Exchange Commission of Thailand (“SEC”).  No person receiving a copy of this document may treat the same as constituting an invitation or offer to him in Thailand and such person shall not distribute or make available this document in Thailand.  The issuer of this document shall not be liable in any manner whatsoever in the event this document is distributed or made available to any person in Thailand receiving a copy of this document.  Since no application for approval has been or will be made to the SEC for the offering of the securities, or for the registration of this document, the securities shall not be offered for subscription or purchased or made available, whether directly or indirectly, in Thailand.  It is the sole responsibility of recipients wishing to take any action upon this document to satisfy themselves as to the full observance of the laws of Thailand, to comply with all relevant government and regulatory approvals, and to comply with all applicable laws, including but not limited to exchange control laws.

If any fund is highlighted in this communication (the “Fund”), its offering document or prospectus contains important information on selling restrictions and risk factors, you should read them carefully before entering into any transaction. It is your responsibility to be aware of and to observe all applicable laws and regulations of any relevant jurisdiction. AXA IM Asia does not intend to offer any Fund in any country where such offering is prohibited. 

The offer, distribution, sale or re-sale of fund units/shares in Taiwan requires approval from and/or registration with Taiwanese regulatory authorities. To the extent that any units/shares of the Funds are not so licensed or registered, such units/shares are made available in Taiwan on a private placement basis only to banks, bills houses, trust enterprises, financial holding companies and other qualified entities or institutions (collectively, “Qualified Institutions”) and other entities and individuals meeting specific criteria (“Other Qualified Investors”) pursuant to the private placement provisions of the Rules Governing Offshore Funds. No other offer or sale of such units/shares in Taiwan is permitted. Taiwanese purchasers of such units/shares may not sell or otherwise dispose of their holdings except by redemption, transfer to a Qualified Institution or Other Qualified Investor, transfer by operation of law or other means approved by the Taiwan Financial Supervisory Commission