LGT Asset Allocation – March 2020

The second wave of the coronavirus spread significantly dampened market sentiment

The spread of the coronavirus outside of China is straining the already tense nerves of market participants. The current situation in Italy and the uncertain developments in Europe are particularly worrying. Constructive figures, whether from the economy or the corporate world, nor the US elections and the unresolved challenges surrounding the Brexit are receiving much attention these days. Investors seem to be focusing almost exclusively on the coronavirus and the possible consequences of its spread for global economic growth.

Our main scenario remains that the related uncertainty is only temporary and that emotions are likely to ease in the coming weeks. Nevertheless, the risk scenario should not be disregarded, especially in view of the current market situation. After seasonally strong months, sentiment could remain gloomy, at least temporarily. The focus on selection – i.e. the concrete selection of investments held in the portfolio – which has already been frequently mentioned at this point, is likely to remain essential, even in the coming months with potentially turbulent markets.

Against this backdrop, the Investment Committee of LGT Private Banking Europe has decided to increase the flexibility of the portfolio and to further increase liquidity. Following an excellent performance, the overweight in gold will be tactically reduced and profits temporarily taken. After last month's reduction, equities remain at a neutral weighting, although we would like to tend to take oversold stress situations as buying opportunities. Within the equities allocation, Europe remains tactically overweighted against Asia-ex-Japan and quality remains in focus. Outside the equity allocation, hardly any risks should be taken in a mixed mandate as investors are no longer adequately compensated due to the low interest rate environment.

Equities: constructive outlook despite headwind caused by uncertainties surrounding the coronavirus

The earnings season has maintained what investors expected from companies on both sides of the Atlantic: Most companies have projected a cautious but constructive outlook for 2020. The investment banks' already traditional profit growth rates of 10% per year are unlikely to be achieved, but an acceleration in profits compared with the previous year was forecast. With the second wave of the coronavirus spread now taking place, many companies are of course also confronted with additional uncertainty. Historically, risk premiums for equities rise in such a scenario and thus prices fall. This was also one of the drivers that led us to reduce the equity weighting from overweight to neutral after the first wave of the coronavirus spread. From today's perspective, it is still too early, respectively there is still too little clarity to make a new investment in equities. We recommend to focus on liquidity in the short term and to be patient until attractive re-entry prices are available.

Fixed Income: the second wave of the coronavirus spread is driving investors into US government bonds

In the current uncertain situation, investors are desperately trying to temporarily park their money in asset classes with a positive return. This is the only rational explanation why, with US economic growth close to potential output and inflation at 2%, long-term government bonds in the form of the ten-year Treasuries have a yield of less than 1.4%, close to the 2016 low during the China crisis. We consider this strength to be temporary and expect interest rates to tend to rise in the coming months, although a rapid increase towards 2% is unlikely from today's perspective. Until there is more visibility regarding the economic impact of the coronavirus, we remain on the sidelines for emerging market bonds and are very selective in our choice of corporate bonds at the expense of high-yield investments, which do not compensate for the risk taken in the current economic environment.

Alternative investments: taking profits on yellow precious metal

In addition to the greenback and US government bonds, gold always serves as a safe haven in crisis situations and has also performed excellently during the second wave of the coronavirus spread. Despite the strength of the US dollar since the beginning of the year, gold has been able to make steady gains and has performed strongly since November 2019. We maintain our positive medium-term assessment for the yellow precious metal, but following the recent sharp rise in its price, we are tactically taking profits in favor of liquidity, and halving our overweight compared with the strategic asset allocation.

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Imprint
Publisher: LGT Bank (Switzerland) Ltd., Glärnischstrasse 36, CH-8027 Zurich
Author: Thomas Wille, Head Research & Strategy, Email: thomas.wille@lgt.com
Editor: Natija Dolic, E-Mail: natija.dolic@lgt.com
Source: LGT Bank (Switzerland) Ltd.

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