Monthly House Views - From promises to implementation: where will economic policy go ?

Inflation fears = upward pressure on yields 
At the start of this year, there is still a great deal of uncertainty surrounding the implementation of economic policy choices. In the United States in particular, the new administration will have to clarify to what extent the policies promised during the campaign will be implemented. These uncertainties are fuelling fears about the inflation outlook, which is generating volatility in long-term bond yields. 

This volatility should not, however, detract from the fact that the economic environment remains firm. In the United States, growth remains strong, underpinned by sound households and businesses balance sheets. In Europe, growth appears muted and uncertain, but still positive, underpinned by both easing inflation and lower interest rates. Finally, in China, exports remain very vigorous. But the ailing property market continues to weigh on domestic demand. Details to come on the stimulus package could eventually provide some support.. 

 
We are maintaining our overweight on equities and increasing our exposure to US credit markets 
We continue to favour the US equity market, in particular sectors and styles that would benefit from the favourable industrial policy and withstand the high-interest rate environment. We are also increasing our exposure to US corporate credit markets, which offer an attractive level of carry and improving fundamentals. In addition, we remain overweight to the European market, favouring companies and sectors that are both exposed to US activity but with limited risks in terms of trade restrictions. On the other hand, we remain underweight to emerging equity markets, with China specifically targeted by trade restrictions. 

While maintaining strong strategic orientations, we maintain a very diversified allocation. Market volatility is expected to remain the order of the day in the current political and geopolitical context.

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