Market overview

As long as central bank music plays

Investment Strategy By Lyxor Cross Asset Research
Third Quarter 2020
Macro & Market Views
Virus containment is progressing unevenly, advanced in Europe and Asia, but concerning in the U.S. and Latin America. Meanwhile, lockdown easing and economic reopening is accelerating worldwide. With a full global economic recovery priced-in for 2021 and stimulus reflected in richening asset valuations, there is little room for disappointments. Yet, record policy support is absorbing a large share of the shock and is flooding markets with liquidity, thus providing a backstop to asset prices. Furthermore, authorities would not relapse in large-scale shutdowns. Risks look balanced in mainstream assets, which calls for a neutral stance.

We see more relative opportunities. Uneven responses to the pandemic and diverging monetary and fiscal stimulus would continue to lead to diverging economic and market performances in Q3 2020. Additionally, as we move past the pandemic peak, other risks are resurfacing with rising trade tensions, U.S. elections and Brexit, requiring tactical and pragmatic positioning.

We are neutral on developed equities. We tactically favor EMU equities, supported by ECB’s purchases and by a positive optionality from the proposed Recovery Fund. U.S. stocks are floored by the unconditional Fed support, but valuations are rich considering U.S. elections and virus spread related risks. Within uncompelling Japanese equities, we see value in foreign vs. domestic exposed stocks.

Central banks’ efforts to keep low real yields would crush rates directionality, keeping us neutral on major developed sovereign issues. We foresee a modest yield curve steepening in the U.S., Europe, and UK. A likely inflation spike next spring calls for an O/W stance on breakeven. In high-yield, we favor U.S. over Europe amid slightly cheaper valuation and more conservative default estimates.

EM economies are facing multiple challenges, though situations are highly heterogeneous. We U/W EM equities that may not be the usual “early cycle plays” relative to DM, favoring relative calls (O/W China and Russia, U/W Brazil). Valuations look unappealing in EM HC debt, but with default risks concentrated in smaller issuers and central bank support, we stay Neutral.

The oil and copper rallies need consolidation. However, oil destocking and surging Chinese copper demand keep us strategically O/W on both. Gold fundamentals remain supportive (O/W), but the upside looks more moderate...