Macro-economy - CIC Market Solutions

The scenario of a US administration that will shift back to the Democrats and a divided US Congress (with the Democrats keeping the House of Representatives and the Republicans holding onto the Senate) is still uncertain, but is the most likely outcome, if the most recent data is to be believed.

The final results of the election are still not known, be it for the presidential election or for the upper and lower chambers of the US Congress. However, according to the latest numbers, Joe Biden is ahead in terms of the number of electoral college votes needed to take him to the White House. What's more, the count in the five States that are still hanging in the balance is moving in Biden's favour and could see him secure the presidency in the next few days.

The Democrats also look set to hold onto the House of Representatives, with a smaller majority than in the previous term. There is a reverse situation in the Senate, which the Republicans could well keep. However, the Senate election is the most uncertain outcome of the three, and the final results may not be known until 5 January, when a run-off will be held for one or probably two seats.

No outcome is absolutely certain yet, as a recount may be requested in a number of states if the gap between the candidates is very narrow. Legal proceedings have already been launched to petition for recounts or the setting-aside of certain ballots. It could be weeks before the final results are announced.

Gestion - Crédit Mutuel Asset Management

If the final outcome is a split Congress, there is a risk that this could slow the roll-out of Biden's initial programme. The Biden administration will probably have to revise its three-year stimulus package, which equates to 10% of GDP and leans heavily towards responsible low-carbon investment and access to health care. Similarly, it is not clear whether corporate and household tax rates will be raised.

That said, with an outcome seeming imminent, investors have more visibility, and a win for Biden should relieve some of the prevailing geopolitical tension, which will likely facilitate a resumption of trade. Lastly, Joe Biden has also made it known that he will be signing the US up to the Paris Agreement again very quickly.

The financial markets rebounded this week pending the final election results, which could take days or weeks, depending on the success of Donald Trump's lawsuits.

1- Multi-asset investment:

Prior to the US election, we had maintained a neutral allocation in our portfolios against our benchmark indices, opting for many sources of protection and diversification.

Once we know the final outcome of the election and all legal challenges have been exhausted, we will consider adding to our positions and refocusing our investments. In the medium term, a win for Biden and a Republican Senate will lend themselves well to US and European equities once the COVID-19 clouds have cleared. Moreover, we expect to see less inflationary pressure on US interest rates and a weaker dollar.

2- Equity markets:

In recent weeks, we have found stock markets to be relatively unresponsive to the good third-quarter earnings releases, pending more clarity on the pandemic and the US elections. The pressure exerted by the pandemic and its various waves remains tangible, as evidenced by the degree of volatility registered in the past six months, ranging between 22% and 40%.

During the second half of October, the equity markets registered corrections of 6% to 8%, with the largest caps in the Euro area amplifying the movement to a certain extent, while US large caps, including tech stocks, remained close to -6%. In contrast, emerging market stocks barely suffered any corrections at all. In early November, ahead of voting day in the US, the markets staged a quick rally that saw them return to their starting point, ultimately with little differentiation.

The joint efforts of the central banks and governments to nurse a convalescent economy continue to provide strong support for businesses and the markets. We remain constructive on the equity markets for the medium term, once the election and health-related uncertainties have cleared.

3- Opportunities

The funds are invested in value-creating companies that are well-positioned and are displaying promising trends with the capacity to grow.

In preparation for the possibility of the US election fuelling uncertainty, the management team took a cautious approach to its investments in October. Where opportunities arise, the team plans to increase the funds' exposure to stocks in the ecosystem that encompasses energy efficiency, sustainable mobility, renewable energy and infrastructure construction/renovation. These operators could stand to benefit from the Democrats' stimulus package even if it needs to be renegotiated with the Republicans first.

4- Fixed income:

Following a slight widening of risk premiums, the European investment-grade credit market quickly returned to its original level in the wake of the rally in risky assets. Fixed income investors are playing a further increase in the ECB's Pandemic Emergency Purchase Programme (PEPP), which is providing support to this asset class. Riskier segments (high-yield and emerging-market debt) followed a similar trend, within a slightly wider band.

We are keeping exposure in terms of sensitivity close to that of the indices. We remain well-exposed to private and peripheral issuers, which should also continue to display favourable patterns. However, we continue to take a selective approach, preferring corporate and financial issuers with the highest credit ratings.

We also remain positive on high-yield and emerging-market debt, but again with a good deal of selectivity and very granular portfolios. Lastly, beyond the outcome of the election, we continue to believe that US yields could outperform European yields in the coming weeks, as the public health crisis worsens on the other side of the Atlantic. With this in mind, we are sticking with the arbitrage strategy put in place at the end of October based on a narrowing of the Germany 10-year vs US 10-year spread.


Completed on 6 November 2020 at 12pm