Goldilocks ‘light’

Receding political risks, tender economic green shoots and accommodative central banks have underpinned risk assets, benefitting our pro-risk stance. Markets are already discounting a lot of good news, warranting a somewhat more cautious tactical allocation stance into year-end. 

Highlights:

  • Receding political risks, tender economic greenshoots and accommodative central banks haveunderpinned risk assets, benefitting our pro-riskstance.
  • Markets are already discounting a lot of good news, warranting a somewhat more cautious tactical allocation stance into year-end.
  • That said, a Goldilocks ‘light’ environment is still boding well for risk sentiment. Low inflation, bottoming but subpar growth and sustained monetary policy support will keep a lid on core yields while still underpinning risk assets.
  • We maintain overweight in Credit and Equities vs. Core Govies and Cash, but reduce the size of active positions.

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GOLDILOCKS ‘LIGHT’

RELATED INSIGHTS

CHINA’S Q4 GDP GROWTH SURPRISED ON THE UPSIDE, BUT RISKS TO THE OUTLOOK HAVE INCREASED
This morning, China published its Q4 GDP growth alongside with December monthly activity data. Q4 growth accelerated to 6.5% yoy which lifted total 2020 GDP to 2.3%. December real activity data were more mixed. While exports came in strongly, important domestic demand components were a bit unsteady.
COVID-19 FACTS & FIGURES
US President-elect Joe Biden has unveiled a $1.9 trillion stimulus package proposal. Following the recent increase in cases, China has imposed new restrictions and lockdowns in the Hebei province. Canada has implemented new restrictions and a provincewide curfew in Quebec that will last until February 8. German Chancellor Angela Merkel warned that the recent rise in Covid-19 cases could force the country to prolong the nationwide lockdown until April.
EQUITIES: STAY POSITIVE WITH A VALUE-CYCLICAL TILT
Following a monster rally in stocks last autumn, multiples are well above historical averages, but equity investors can count on lingering low yields, tighter credit spreads and increasing central banks’ balance sheets which in turn maintain low the cost of equity and the discount rate of future cash flows.