Investment Strategy - Quarterly Outlook Q3 2020 - Keeping our balance

Macro We have seen a pick-up in retail sales and business confidence surveys in recent weeks as major advanced economies begin to emerge from lockdown. However, activity remains well below pre-crisis levels and some headwinds continue to blow – COVID-19 cases continue to rise across the globe and many restrictions on activity are likely to remain in place for some time. Moreover, continuing claims for jobless benefits in the US remain stuck above 20 million, suggesting that companies are rather slow to rebuild staffing levels. We continue to expect a gradual recovery rather than a rapid return to pre-crisis activity levels. This means that fiscal and budget support packages remain necessary for now. Central Banks As expected, the US Federal Reserve (Fed) has slowed the pace of asset purchases recently as it continues to add holdings to its balance sheet (which has jumped 71% since end February). However, it shows no signs of diminished commitment to support the financial system through ample injections of liquidity. Similarly, the European

Central Bank (ECB) recently announced that euro zone banks had taken up €1.3 trillion in ultra-cheap long-term refinancing which should help improve bank profitability and encourage broader lending to customers. The same policies hold sway in the emerging world – most central banks have cut rates, many are pursuing asset purchases and China continues to reduce reserve ratio constraints on bank lending.

Markets Central bank buying is helping keep government bond yields close to historic lows – and indeed negative in many countries in the core of the euro zone – enabling markets to absorb the vast new quantities of government borrowing to pay for their support programmes. High quality corporate bonds are also targeted in asset purchase programmes, allowing borrowers to roll over debt at very low rates. The ample liquidity environment has sparked an extraordinary rally in equities from late-March lows and will continue to extend support. However, corporate earnings are slumping and valuations are demanding which argues for keeping exposure Neutral for now.

Bottom line Within fixed income markets, we express a clear preference for investment grade bonds over government debt and High Yield (HY), where default risk remains high. UK equities have underperformed other European markets year-to-date and now look cheap, warranting an upgrade. We also propose switching to an Overweight stance on euro zone equities, which should be favoured by generally low COVID-19 infection rates and a cyclical recovery in earnings. The same factors should support the euro against a pricyUS dollar and we suggest moving to an Overweight stance. Finally, gold and hedge funds remain our preferred diversification tools in portfolios.

In accordance with the applicable regulation, we inform the reader that this material is qualified as a marketing document. CA159/JUL/20

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