multi asset allocation views - axa im

Multi Asset Allocation Views January 2021

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Multi-Asset Investment views

Our key messages and convictions

#1Despite a slowdown in

economic activity,

corporate earnings

continue to rebound

#4Slowing Chinese demand,

and increased supply, as

production normalises,

weighs on commodity

prices

#2Despite support

from fiscal

initiatives,

valuations are no

longer attractive

due to tight

spreads #3Government

bond yields

expected to rise

as Central Banks

tighten monetary

policy

Negative on

Commodities

Source: AXA IM as at 20/12/2021

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Positive on equites Neutral on

Investment Grade

Credit

Negative on

Sovereign Bonds

Govies

Euro core

Euro peripheral

UK

US

Inflation Break-even

US

Euro

Credit

Euro IG

US IG

Euro HY

US HY

EM Debt

EM Bonds HC

Asset allocation stance

Positioning across and within asset classes

Source: AXA IM as at 20/12/2021

2

Developed

Euro area

UK

Switzerland

US ▲

Japan

Emerging & Equity Sectors

Emerging Markets

Europe Cyclical/Value

Euro Opening basket

Euro Financials

US Financials

US Russell 2000 ▲

Key asset classes

Equities

Bonds

Commodities

Cash

Negative Neutral Positive Change ▲ Upgrade DowngradeLegend

Asset Allocation Equities Fixed Income

▼

Central & alternative scenarios – 2022 Outlook

• 2022 post-COVID rebound persists. Global

growth remains slightly above potential in

2022.

• Temporary supply-chain headwinds to

fade in H2 2022, helped by broader

vaccine spread in DM and EM economies.

• Inflation declines but remains slightly

above or within central banks’ tolerance

range

• Monetary policy divergence: those with

supply-side issues tighten policy (UK,

Canada), those without do not (Eurozone,

Japan). US depends on labour market

• The fiscal impulse is reduced, but most

with fiscal space temper the adjustment.

Several EMs have less fiscal space.

• Supply shocks last much longer, labour

market withdrawal persists

• Growth weaker, employment rebound softer,

but inflation remains much more elevated for

longer

• Coronavirus mutations sees renewed

outbreaks, worsening supply side issues

• Monetary policy ill equipped to face supply-

shocks, deteriorating Central Banks credibility

forces much tighter monetary policy

• Nervous households maintain high saving

buffers

• China hard landing

• Vaccine and boosters roll out more quickly

spurring pent-up demand burst. Vaccines

remain efficient against new variants

• Supply chain issues are resolving quickly,

leading to a significant rebound in

production

• Labour market participation recovers,

leading to strong income growth and

easing inflation pressures

• Productivity boost following investment

rebound and structural post-pandemic

adjustments

• Growth surprises on the upside in most

regions

• Inflation fades towards (or below in some

countries) central bank targets

• Monetary policy proves more patient than

expectations

• Equities: Risk appetite deteriorates /

equities sell off, volatility spikes

• Safe haven government bonds fail to add

diversification and yields rise

• Credit spreads to widen

• EM debt to come under pressure

• Equities: modest returns with increased

volatility

• Government bonds: Gentle rise in longer-

term rates, driven primarily by rising real

rates in a what still-expected-to-be

a gentle tightening cycle.

• Credit: Benign spread regime can extend

into 2022

• Equities: Risk-on environment with

equities making further gains

• Government Bonds: yields remain range-

bound

• Credit: Spreads grind tighter

Entrenched supply shocks Central scenario Goldilocks 15% 60% 25%

3Source: AXA IM as at 20/12/2021

Setting the scene: our global economic outlook

Decelerating growth amidst supply bottlenecks, Central Banks begin to normalise their monetary policy

• The US economy is expected to be operating in excess of potential growth

in 2022. Nevertheless, headwinds and supply constraints at the start of the

year may delay an inventory rebound into the 2nd half. Income compression

and Covid may also weigh on consumer spending in the 1st quarter. We

forecast growth of 3.5% in 2022 and 2.7% in 2023.

• In the Euro area, consumption is softening with most likely further pressure

from tougher restrictions linked to the Delta variant of Covid-19 wave and

uncertainty around the Omicron strain. Manufacturing data remains mixed

however benefiting from the rebound in auto production. We forecast GDP

growth at 5.0% in 2021 and 3.9% in 2022.

• In China, property market woes are exerting more persistent pressure than

the power crunch which waned following a concerted government effort to

ensure a stable supply of energy. China’s “zero Covid” strategy, resulting in

periodic lockdowns, at great cost to the economy. Trade resilience

continues to serve as a cushion against economic headwinds. We maintain

our 2021 forecast at 7.9% and 5.0% for 2022.

• In EM economies, the recovery paths remain Covid-19 dependent, but

inflation acceleration is broad-based pushing towards a normalization in

monetary policies despite diverging trends.

• Most major central banks begin to normalise their monetary policy to

become less accommodative. The US Fed* indicated it would tighten

earlier than expected with an initial hike as early as June 2022. The ECB**

continues to adhere to a very gradual and predictable normalisation with

the scheduled termination of PEPP purchases offset by scaling up APP. As

expected, the BoE*** started tightening policy with an initial rate increase

in December. The BoJ**** maintains its accommodative stance.

AXA IM Research & Investment Strategy economic forecasts*

Real GDP growth (%) 2020 2021* 2022* 2023*

World -3.2 5.7 4.2 3.6

Advanced ecnomies -5.0 4.9 3.8 2.4

US -3.4 5.5 3.5 2.7

Euro area -6.7 5.0 3.9 2.1

UK -10 6.8 5.0 2.3

Switzerland -2.5 3.5 3.0 1.6

Japan -4.9 1.9 3.5 1.6

Emerging economies -2.0 6.2 4.4 4.3

China 2.3 7.9 5.0 5.3

Source: AXA IM, Consensus Economics, IMF and Datastream as at 20/12/2021*Federal Reserve ** European Central Bank, ****Bank of England, ****Bank of Japan

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Overview of asset allocation stance

Our views:

• Despite Omicron’s wobble, we expect equity market has further to run in

2022, even if the balance of risk is less supportive than in 2021.

• Our macroeconomic scenario is for the post-COVID rebound to persist and

global growth to remain slightly above potential in 2022, even as it

decelerates. We expect inflation to ease in the second half of 2022 from very

high levels across major economies as demand slows and supply rises, cooling

down goods prices, but to remain slightly above the Fed’s target for some

time, while it should come back within ECB’s banks’ tolerance range.

• In this context, most Central Banks will tighten their monetary stance, with

three rate hikes expected for the Fed next year. Although the mix of higher

inflation and lower growth as well as policy stimulus is clearly less supportive

for markets, we don’t expect this shift to destabilize markets. This hawkish

pivot should support higher government yields over time, through higher

real yields, hence our negative view on the asset class.

• We remain moderately bullish on equities as earnings should continue to

be the main driver of returns. With economic growth still above potential,

we see another year of decent corporate revenue growth.

Our key convictions:

• Positive on equities - Growth should remain above trend in 2021 and 2022,

underpinning earnings; financing conditions likely to remain accommodative.

We continued to reduce our exposure on the back of less supportive

growth/inflation mix

• Negative government bonds – The Treasury market is prone to outsized

bouts of volatility as investors question the growth and inflation scenarios.

Above trend economic activity, rising inflations expectations and less

favourable technical factors should push bond yields higher

Real yields should start to very gradually normalize in 2022

Key asset classes

Equities

Bonds

Commodities

Cash

Change ▲ Upgrade Downgrade

Source: AXA IM, Bloomberg, 20/12/2021

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▲ Upgrade Downgrade

Equity markets outlook and convictions

Our views:

• We remain relatively constructive – Despite a less supportive policy

background in the shape of potentially tighter monetary policy and sticky

inflation, overall growth is strong, rates are still low, and earnings growth

remains strong helped by decent nominal growth (see chart top right)

which helps underpin markets. However, the 5th wave and emergence of

the very contagious Omicron variant again hinders ST visibility and could

impact the services sector.

• Valuations look high on an absolute basis but so far multiples have been

able to contract due to the very powerful earnings recovery as illustrated by

the chart top right. EPS revisions are beginning to slow, but we expect EPS

growth closer to 8% for 2022 . Yet higher input prices have not been a

major issue, and companies have been able to protect their margins through

higher productivity gains and by passing through higher prices. How much

further this can go is a moot point. The ERP remains high so has room to

absorb potentially higher bond yields before it becomes a serious problem

for markets.

• Sentiment is cautious and positioning is not stretched. Looking ahead into

2022 a more defensive country allocation will be warranted.

• The much-awaited Fed policy announcements were generally well received.


• Positive banking sector in the Eurozone as the sector is positively correlated

to rising yields, valuations are reasonable, a meaningful write-ups on loan

loss provisions as balance sheets recover. We expect the Yield curve to

steepen into 2022 which would represent a profit taking opportunity.

• Positive US Small Caps which have lagged broad market recently and

typically benefit from a strong seasonal effect into the new year. ▼

Source: AXA IM, Datastream as at 20/12/2021

Emerging & sector diversification

European

cyclicals/value

EU Financials

EU reopening basket

UK domestic stocks

US cyclicals/value

US Small Caps

Developed

Eurozone

UK

Switzerland

Sweden

US ▲

Japan

▼

▼

Government and inflation-linked bonds outlook and convictions

Source: BBG 20/12/2021

Our views:

• Global nominal bond yields have seen a higher degree of intra-day volatility

whilst not managing to break out of an established trading range that has

now prevailed since Q2 2021. Nevertheless, the tendency has been to

navigate to the lower ends of the range as Central Banks appear to command

a high level of confidence from markets in relation to their view of medium

to long term inflation levels. Very short maturity markets have experienced

some funding stress lately whilst curves have generally flattened lately.

• Inflation break-even pricing remains well supported but marginally lower

than recent highs as energy markets have begun to calm down.

• Macro (negative) – growth momentum remains above trend although

slowing in vigour which should cap expectations for significantly higher bond

yields.

• Valuation (very negative) – marginally deteriorated as long end yields rallied.

• Sentiment (positive) - inflows remain positive but surpassed by money

markets lately.

• Technicals (negative) - Demand/supply dynamics in Q1 are likely to be less

favourable to core yields.


• Government Bonds: Negative Core with rates set to move higher in range

• Inflation Break-evens: Neutral Change ▲ Upgrade Downgrade

▼

Govies

Euro core

Euro periph

UK

US

Japan

Inflation Break-even

US

Euro

Emerging

Emerging Markets

Bond term premium remains depressed...or complacent?

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Credit bonds outlook and convictions

Source: Axa R&S 20/12/2021

Our views:

• Credit spreads remain largely stable despite a small degree of deteriorationlately linked to risk aversion and poor end of year levels of liquidity.

• Inflows have reversed especially in higher yielding part of the creditcomplex.

• Emerging Markets and specifically Asia High Yield are being pushed heavilyas value opportunities and flows have been more balanced lately thandeveloped markets which had larger outflows.

• Macro (positive) - Ongoing post lockdown macro recovery with higherearnings, lower leverage supports ratings and valuations.

• Valuations (very negative) – Historically tight credit spreads leaves littleroom for complacency, but context skewed by Central Banks and near zerodefault rate expectations.

• Sentiment (neutral) - Investor flows have deteriorated as risk aversionclimbs with volatility pricing across markets.

• Technicals (negative) – Underlying nominal yields should rise gradually asdemand/supply dynamics shift yet near term refunding challenges are nearzero for credit markets.


• Investment Grade: Neutral

• High Yield: Neutral (in the absence of equity allocation, would be preferred

asset class)Change ▲ Upgrade Downgrade▼

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Credit

Euro IG

US IG

Euro HY

US HY

Index yield minus Index Coupon - refinancing still cheap

Our views:

• USD: To remain marginally supported against low yielders. FED terminal rate

still underpriced. Inflation pressures in the US look particularly resilient

within G10.

• EUR: The case for ECB hawkishness is weaker. Current Covid wave is more

challenging for EU so far, although the peak might be close. Rising tensions in

Ukraine could also be a headwind. EUR short positioning and undervaluation

are still light. French election risk not yet priced. EURUSD skewed lower for

now before a possible rebound later next year.

• NZD: Supported by reliably hawkish RBNZ. Inflation well above target. Record

low unemployment. House and export prices soaring. Exiting lockdowns,

heading into summer. 89% of adult population freshly fully vaccinated.

• GBP: Could become attractive once UK passes the omicron peak : BoE more

reasonably priced, cheaper, better vaccination.

• RMB: Skewed higher as omicron is prolonging supply disruptions, but recent

PBOC intervention clearly limits upside potential. USDRMB to rebound later

with FED hiking, and disruptions normalizing.


• We hold a bullish view on NZDEUR and bearish bias on EURUSD

Currency market outlook and convictions

Change ▲ Upgrade ▼Downgrade

▼

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Delta variant spread in EU accelerating the fall of EURUSD

Currencies relative to USD

EUR CAD

GBP NZD

JPY NOK

CHF SEK

AUD RMB

Source: Bloomberg , AXA IM 20/12/2021

Commodities

Oil ▲

Industrial Metals

Gold

Commodity market outlook and convictions

Source: Bloomberg , AXA IM 20/12/2021

Our views:

• Demand for cyclical commodities is expected to decelerate in line with

global economic activity. Sentiment for cyclical commodities

deteriorated as investors became more risk averse whilst technicals are

mixed thus less supportive.

• Following the severe oil price correction, we adopt a more neutral

stance on oil prices following their return to the high end of their

historical trading range. This move reflects a shift from current excess

demand which we expect will move to an oversupplied market in 2022. In

addition to softer seasonal demand, there will likely less of a pick-up

from jet fuel demand following the surge in the Omicron variant. Supply

is expected to continue to increase in line with OPEC’s programmed

quota cut roll-backs and modestly higher US production.

• Industrials metals demand should suffer from weaker demand from

China. In parallel, supply is expected to normalise for some metals

(copper), in particular from Latin America, leading to a surplus next year.

Aluminium’s demand and supply dynamics are more balanced.

• The gold price remains anchored by lower real rates and the recovery in

jewellery demand. Stickier higher inflation is also supportive. However,

safe haven demand is less apparent amidst headwinds from the prospect

of higher nominal yields and a stronger dollar.


• Given markets have only partially integrated our expectation that supply

will increase amidst decelerating demand for key commodities, we

maintain a negative stance on the commodity complex.

Oil price correction brings oil back within historical trading range

Change ▲ Upgrade Downgrade

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▼

Volatility outlook and convictions

Our views:

• “Rock'n'roll year”: Looking back on the 2021, the track record reveals

that we experienced elevated volatility especially in Q4. Equity volatility

spiked many times on quite different thematics. Overall, the implied

volatility remains in high regime without being able to dip below 15. On

rates, slowly and gradually, volatility has increased fuelled by the

inflation risk and central bank “tapering” theme. On commodities, the Q4

experienced a large spike in the ICE brent implied volatility while the rest

of the year it evolved in a normal range. Last, but not least, FX volatility

didn’t react yet, being muted so far.

• In 2021, skews of major global indices continued to trade relatively

rich. Hedging demand remained relatively strong throughout the year. In

September, global equity skews reached highs driven by concerns of

inflation and bond volatility. Additionally, there is strong demand for

OTM put hedge on the S&P500 and regular upside call supply from

overwriters to generate yield. On top, the dealer gamma hedging

maintains a steep skew.

• Finally, 2021 has been a good year for short-volatility strategies, both in

absolute and risk adjusted terms

Elevated Cross Asset Implied Volatility

Source: AXA IM, Bloomberg Finance L.P., 20/12/2021


• To prepare 2022, maintain high level of convexity hedging,

• Enter long FX implied volatility, being the last assets to not have yet repriced risk unlike other asset classes.

• Around 16-17, reduce exposure to short volatility strategies.

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multi asset allocation views - axa im

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