Towards higher and more sustainable?
The central scenario is a return of GDP to pre crisis levels by the end of next year. Growth would then revert to its long-term trend.
The alternative scenario is a more significant and, above all, more sustained increase in . There are multiple reasons for this scenario: ¤a global rise in (the United States, Eastern Europe, etc.), ¤shortages in certain sectors and disruption of production chains that are not rapidly solved, ¤wage linked to a rapid recovery and a sectoral reallocation that is creating tensions in the labour market, ¤changes in central banks' attitude that tolerate more , ¤increases in public spending and deficits due to an ageing population, ¤strong growth in monetary aggregates which has effects on prices influenced by financial variables.
One can then imagine a scenario in which stabilises within a 2-3% range in a more sustainable way. In this case, the will be forced to reduce its support for activity and its very lax monetary policy more quickly than expected.
A variation of 225 bps over 4 years, as we expect, has not arrived for a quarter century. Such increases, however, was common during the 60’s to 90’s, when rates were higher. This would be a sharp break from the trend of the last quarter century, but the level reached would not be aberrant.
"Satellite" bonds less penalised
Sensitivities to changes in Bund and
We observe that they are variable according to the and market regime.
While core bonds - government, corporate IG - have a negative sensitivity whatever the market regime, commodities provide a good hedge in most market environments.
The sensitivity of equities varies according to market direction: it is rather positive during declines and negative during phases of rises for Value and High stocks as well as Basic Materials, Industrials, Financials and Utilities. The opposite is true for Growth and stocks and Healthcare sectors.
In the event of a sharp and sustainable rise in coupled with a rise in rates (alternative scenario), with negative Bund and sensitivities would be penalised, in particular core fixed income assets that would go into zero or negative performance areas. This is not the case for “satellite” bonds (high yield, emerging debt…) which would maintain a positive expected performance. This scenario would also benefit equities and some commodities (copper).
How to select the right assets
Ostrum AM’s 5-year allocation views favour equities over fixed income, both for insurance-based and traditional active investment, as a natural hedge to our central and alternative scenarios, with an attractive expected
Market timing of fixed income selection will be crucial to take advantage of expected volatility and benefit from attractive entry points. For credit, banks will be favoured. Indexed bonds will be avoided for active insurance management.
For equities, the value style and cyclical stocks will benefit from an environment of rising . But we must be cautious of value traps. Growth style and defensive stocks will struggle to perform. Moreover, sectoral allocation will remain discriminating for equity management.
In terms of diversification via funds, variable rates and convertible bonds look the most attractive to us. Euro-hedged emerging market debt offers significant carry but geographical selection and active duration management will be crucial, especially over the short term. The same is true for shorter-duration high yield bonds, with default risk under control. carry and breakeven strategies should be favoured amongst -linked assets. Global bond diversification will focus on total or absolute return strategies with tactical and active duration management.