Investment Update October 2020

The economic recovery is running out of steam but the markets are holding up

In September the global equity markets fell -3,59% in USD and -1,77% in EUR. During the first three weeks of September the US markets in particular fell by almost 10% before rising again. This change occurred against a backdrop of the economic recovery observed following lockdown running out of steam. Moreover, the various high-frequency indicators used to analyse economic activity on a daily or weekly basis show a loss of momentum.

The pandemic continues to show its effects: the number of cases recorded is starting to rise again in Europe and the United States. Globally, there are now over 33 million cases and over 1 million deaths. However, this development needs to be put into perspective because for the moment it appears that we are not yet moving in the direction of a new lockdown. In fact, in the major economies the hospital services have the capacity to take in patients: this means we are far from a health crisis similar to last spring.

The financial markets meanwhile are still buoyed by a fundamental trend led by three major factors. The first is the central banks: the Quantitative Easing (QE) policies implemented by the central banks of the major economies since the 2008 crisis are continuing to expand after the pandemic. The amounts injected every month are astronomical, and the inflation expectations constantly revised downwards only cast doubt on whether these policies should be continued.

Secondly, as the COVID-19 crisis hit hard, a new stimulus was introduced: the expansionary budgetary policies offset consumption and private investment after they took a nosedive. In the United States in particular, stimulus plans worth several tens of billions of dollars reached nearly 20% of GDP. Currently, the US Congress is examining the issue of a nearly USD2.000 billion stimulus plan that can be implemented at any time. Such a sum is able to push back up the indicators that seem to mark a pause, and will also make it possible to increase risk appetite again on the equity markets.

Finally, it should also be noted that the market trend remains bullish, with technical indicators remaining in positive territory.

The September correction on the US equity markets in particular offered us an opportunity to increase our equity weighting, in view of the favourable trends and possible stimulus policies that would fuel the economy and the appetite for risk on the markets.

In short, we maintain a slight underweighting on equities that, if necessary, we will be able to gradually wipe out in favour of a more favourable positioning on equities if the trends are confirmed.

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