Macroeconomic outlook – Raphaël Gallardo, Chief Economist
- The deceleration of the global economy should gather pace next year due to four headwinds: a 5th wave of COVID, a food and energy price shock, the slowdown in the Chinese housing sector, and monetary tightening in emerging markets and the anglosphere.
- The US economy is less vulnerable to these shocks and will thus intensify its inflationary decoupling from the rest of the world.
- The Fed can no longer afford patience, but the initiation of monetary normalization will bring new risks to financial markets, given expensive valuations of domestic assets.
"The European economy suffers from the rise in its energy import bill and its dependence on global manufacturing supply chains, still disrupted by the pandemic. But, contrary to the US, it will benefit from the positive fiscal impulse of the NGEU plan.”
“Given the ongoing adjustment in housing, China still needs strong exports to maintain adequate GDP growth. As a result, Beijing will continue to resist CNY appreciation by accumulating foreign assets. These foreign assets will, in large part, be recycled on the US Treasury market, complicating the Fed’s job of monetary normalization. China will be under pressure from the US to move to a more broad-based stimulation policy in the course of 2022.”
Investment strategy and allocation – Kevin Thozet, Member of the Investment Committee
- In equities, we focus on secular growth companies with good visibility i.e. not overly dependent on the economic cycle and capable on passing on costs induced inflation while preserving activity.
- In fixed-income, we selectively target corporate bonds with attractive yields and which business models are not overly disrupted. A necessary feature in a context where abundant liquidity has limited price discovery mechanisms.
- In Emerging markets offer pockets of value (on both fixed income and equity markets) having suffered from orthodox policies in China, inflation and the prospect of a normalization of US monetary policy.
“We moved from an environment of “QE infinity” and “lower for longer” one year ago to one of a global and generalized swift interest rates hike. Differentiated economic environment across economic blocs, context calls for a differentiated approach.”
“Investors are potentially embarking high level of credit risk for close to 0% real returns. That abundant liquidity combined with such a financial repression environment implies that price discovery mechanism do not function as they historically did. Resulting inefficiencies are positive for active managers.”
In such a context where inflation could remain for longer while the economic cycle matures, our risk management tools are concentrated around:
- Active management of exposure to bonds issued by well rated sovereigns given volatility on interest rates on the back of inflation and debt level related concerns, low bond yields not sufficient to stomach such volatility and markets particularly prompt to reprice on the upside and the downside
- Cash and short-term instruments appear as most suited to sail through episodes of volatility
- And the USD given it haven status and dynamics