Pascal Blanqué, CIO of Amundi and Vincent Mortier, Deputy CIO of Amundi
After enjoying stellar performance this year, investors will increasingly question whether the global economy will proceed towards a trade war-engineered recession moving into 2020, thereby ending the longest ever bull market. Or, if growth stabilises at a low level, and potentially rebounds, the cycle could extend even further. In Amundi’s view, the retreat in global trade is a major change to the structure of growth but will not lead to a full-blown recession, especially at a time when cumulative loose policies will gear up and a partial deal between US and China is in sight. Monetary and fiscal combination, a theme that will become prominent next year and beyond, may extend the cycle further, and may as well strengthen the resilient domestic demand. While the noise on trade-related issues will be high, a material escalation, which could damage the US economy, is unlikely, given the upcoming US elections in 2020.
In 2020, the path for investors might not be linear.
- In the short term, market expectations for policy actions have gone too far and need to adjust. The adjustment process will drive volatility in bonds, with a bottoming out of core bond yields already started, and rerating in some expensive defensive sectors in equity. On the US dollar, the US yield advantage should prevent a major dollar sell-off in 2020. In terms of currencies management, we believe that a slight depreciation of the dollar is the most likely outcome, but this would be enough to restore some confidence in selective EM currencies, for which pessimism is overdone.
- Beyond the short term, the trend is towards a more aggressive policy mix that could potentially include unorthodox measures if the risk of recession intensifies. The result will be an extension of the credit cycle that could eventually end in an explosion, although it is unlikely to happen in 2020. Investors will be forced to pile up in crowded or illiquid areas where the risk is masked by excessive policy accommodation. To safeguard investors’ interests in a world flooded by debt, sustainability (of corporate balance sheets or of fiscal paths in emerging markets – EM) must be a key driver of selection now, as fundamentals have already started to deteriorate.
In terms of investment strategy for 2020, instead of fearing a global recession, investors should focus on adjusting the portfolio exposure to the de-globalization trend. They should also prepare for a mature and extended credit cycle, with higher liquidity risks due to more stringent regulations post-2008 crisis. We envisage three main themes for investors.
- First, income and opportunities from rotation towards neglected areas will be the equity 2020 story. While expectations adjust to the probability that one of the alternative scenarios (upside or downside) becomes mainstream, the lack of strong directional trends in the markets, and weak earnings growth should drive investors to search for areas of resilience in the equity income/dividend space. Once the outlook stabilizes, and yields bottom out (PMI – purchase managers index - rebound expected in H1, some fiscal expansion gears up later on), there could be some potential for rotation in areas of attractive valuations. Cyclical stocks (quality in Europe and value in US) and small caps would present opportunities to exploit throughout the year.
- Second, search for yield optimisation, with increased scrutiny and flexible strategies, will drive fixed income markets. The hunt for yield will remain a key theme, in the era of ultra-low interest rates (not necessary negative) and Central Banks restoring some sort of quantitative easing - QE- or even going beyond it. However, crowded areas and liquidity risk persist and require a deep dive into credit opportunities (both in developed and emerging space). High yield (HY) will remain attractive, amid a benign default outlook. However, having an adequate time horizon in mind would be important, even more now that a possible mismatch between scarce market liquidity and fund daily liquidity is striking. From a company perspective, increased scrutiny at sector and security level will also be key to avoid unsustainable business models, just kept alive by investors’ appetite for yield. In an environment of monetary and fiscal accommodation, EM bonds are attractive, with a preference for the hard currency, and with opportunities opening up in local currencies through the year.
On the core fixed income component, a flexible and diversified approach is appropriate as volatility may return due to varied news flows, before investor expectations adjust to different scenarios. US high-quality bonds deserve a mention here for their liquidity and yield premium.
- Third, new themes will emerge in emerging markets from a more fragmented world and a retreat in global trade. Investors will have to go beyond the traditional “global” EM concept and dig deeper to capture attractive opportunities and themes. Among the latter, we favour the “help yourself” countries that have strong domestic demand and are less exposed to external vulnerabilities. Alternatively, themes such as the Silk Road that capture the potential new role of China in the geopolitical landscape will deserve increased investor attention in our view.
To conclude, investors should start building volatility-proof portfolios. Volatility has been constrained by the proliferation of some investment strategies (i.e. selling volatility to get the premium), but as market expectations adjust, volatility spikes are likely. We have entered a phase in which it is not the average level of volatility that matters, but the fact that markets will shift from quiet phases to periods of high volatility. To volatility-proof their portfolios, investors should consider liquid alternative strategies that offer low correlation vs traditional asset classes, and volatility strategies.
Fany De Villeneuve
International Press Relations
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- Source: IPE “Top 500 Asset Managers” published in June 2020, based on assets under management as at 31/12/2019
- Boston, Dublin, London, Milan, Paris and Tokyo
- Amundi data as of 31/03/2021