Navigating an uncertain recovery

THE global economy has clearly bounced back from the fallout of the Covid-19 pandemic.

This could mean opportunities for investors to reposition themselves across various asset classes to potentially gain from the cyclical recovery. The key is to be selective, notes Amundi Asset Management, in its latest Global Investment View report.

For equities, while the fund manager reckons that the current economic recovery could favour a rotation towards cyclical names, investors will still have to tread cautiously across various markets.

In emerging markets (EM), for instance, geopolitical risks such as the US-China tensions, remain key variables. Nonetheless, it remains positive on China’s role as a global growth engine, and feels that Asian and other economies exposed to this will benefit.

“In Asia, we are optimistic on countries such as South Korea. At sector level, semiconductors look appealing, whereas high valuations in healthcare and consumer staples make us cautious, ” Amundi says.

“Investors should selectively explore cheap names in growth/value, with a focus on those offering sustainable dividend yields or growth catalysts, ” it adds.

For US equities, investors should play market divergences with a balanced stance, Amundi says.

“US markets are at the moment being driven by positive expectations around earnings and are also factoring in a new ‘low lockdown trade’, which is supporting tech growth stocks. This, however, appears a bit concerning to us because it underestimates the positive triggers that could come from the availability of a vaccine, therapy, medical treatment and fiscal stimulus, ” it argues.

“The last, in fact, could support a steeper yield curve and further the rotation towards cyclicals, where we prefer industrials to financials and energy. We also like selected quality value stocks that can manage through this difficult economic period and should benefit as the US and global economies rebound and as inflation returns, ” it explains.

As for European equities, Amundi notes that the resurgence of virus cases and subsequent lockdowns may make the region’s economic recovery bumpy.

“The result is extreme market dispersions, which are creating opportunities for a rotation towards cyclicals and value names for active stock pickers. We look for names with strong balance sheets and resilient business models, ” it says.

Amundi cautions investors to be careful of areas of excessive valuation, such as technology.

It says that while it remains positive on healthcare within defensives, it also sees opportunities in cyclical compartments such as building materials as a good way to play the recovery in European equities.

“We increasingly find attractive names in consumer discretionary, where the risk/reward has been compelling, although one has to be very selective, ” Amundi says.

“Overall, we maintain a balanced approach. Another interesting strategy is value, as it could benefit from reflation expectations moving into 2021, ” it adds.

Balanced approach

On fixed income, Amundi is cautious on US high-yield corporate bonds and European government debts. In the case of US high-yield corporate bonds, it says the case for selectivity is high, given that some businesses will be unable to withstand a slow recovery while for European government, it remains active with a focus on relative value trades.

It is neutral to positive on US govvies and investment-grade bonds; European investment-grade and high-yield corporate bonds; EM bonds.

Overall, in a low real rate environment, Amundi says investors should balance the need to get higher yields with the need to buy quality credit at attractive valuations, all the while maintaining sufficient liquidity.

Upside potential

On commodities, Amundi says assets are benefiting from liquidity injections by central banks, a weak US dollar and a strong Chinese yuan. It says the Saudi-led supply cuts have also helped clear the oversupply imbalance in the oil market.

As for metals, it points out, gold prices – which have been rising since March as policymakers stepped in to support the global financial system affected by the Covid-19 crisis – have recently seen some correction on concerns of higher real rates, “normal” risk-on, and a pause in asset buying by the US Federal Reserve (Fed).

Gold prices, it says, will be supported by two main factors: the renewed taxonomy of gold price determinants envisages that central bank balance sheet expansion and Chinese yuan dynamics would play a prominent role; and its conviction for the yellow metal has shifted from a “pure hedge” to an “asset class”, with potential to gain in case of both the downside and the upside economic scenarios.

“Over the past few years, we have discussed gold along the lines of its safe-haven nature in the face of increasing geopolitical risks even when rates were rising and in general amid risk-off events, ” Amundi says.

“More recently, the (inverse) relationship of gold prices with EMs’ dollar funding and real rates has been progressively enforced, ” it adds.

The fund manager says it expects to see further consolidation of gold prices to higher levels, with US$2,100 an ounce as a reference for fair value in its radar.

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