With the worst of the financial storm behind us, we surveyed experts from across the Natixis Investment Managers family to find an answer to this question, and gain perspective on what investors can expect from markets, the economy and the US election as we head into the end of the year.
Our survey of 36 strategists, economists and portfolio managers representing Natixis Investment Managers, 14 of its affiliated asset managers and Natixis Corporate & Investment Banking shows broad agreement on the risks ahead and some likely long-term consequences from this crisis, but an impressive split on what this means for risk assets over the coming months.
Strategists Split on Risk Assets
While the strategists generally agree on a gradual, arduous route to economic recovery – and the risks ahead – opinions are split on what it means for risk assets heading into the final months of 2020: 53% anticipate a selloff, while 47% expect the equity rally to continue through December.
“We know investors are bearish on fundamentals. And plenty are questioning the sustainability of the rally, making the technicals bullish, which is why I think the pain trade is for the market to grind higher,” says Jack Janasiewicz, CFA®, SVP, Portfolio Manager & Portfolio Strategist at Natixis Investment Managers.
Recovery on Its Way, but a Long Road Ahead
After record economic contractions, Natixis strategists see a number of ways for the recovery to take shape. Overall, sentiment suggests an outlook that is relatively optimistic. But one view is consistent: Few think it will happen quickly.
Despite the rebound so far and the unprecedented fiscal and monetary support provided to date, one-third of strategists anticipate a W-shaped recovery, de facto projecting another economic decline. It is interesting to note that this sentiment is shared by respondents who anticipate a rally and those who see a selloff, making the second dip a question of when, not if, for them.
Nearly half (44%) believe that while the recovery is under way, the initial impetus is likely to stall, with the chart looking more like the ubiquitous Nike swoosh or a square root.
Despite the stock market’s swift recovery, few expect the economy will follow suit as less than 3% (2.8%) predict a quick V-shaped recovery.
COVID Squarely Atop Market Risks
Unsurprisingly, as we poll for the risks ahead, a second wave of COVID remains at the top of investors’ minds. With public health experts reporting that risks could increase as a potential second wave ripples across the globe in the fall and early winter with flu season, 86% of those surveyed give COVID a high risk rating “above 5” for an average risk rank of 7.5.
“While the bar is now higher for shutting down economies, if a second wave begins to overwhelm medical facilities, we could see localized shutdowns first, and even national shutdowns,” says Craig Burelle, Macro Strategist at Loomis Sayles. “Additional fiscal stimulus measures would try to bridge cash flow gaps for individuals and businesses, but even so, another wave of bankruptcies would likely ripple through the global economy and shake financial markets.”
But along with the health risk and fears of an ensuing second lockdown, strategists see a number of political and geopolitical risks on the horizon as well. Tied with 86% seeing a risk “above 5” are US-China relations, even though the overall risk score is lower than for a second wave (6.5 average risk score). Other domestic or foreign risks follow, with global trade next (three-quarters see it “above 5”) and the US elections not far behind (two-thirds “above 5”). While a third of strategists see the lack of fiscal follow-through as low risk (“below 5”), 58% are still concerned by Congress’ current stalemate (“above 5”), and a third actually see it as very high risk (“above 7”).
While they are generally unconcerned about the market risks posed by foreign interference in the upcoming US presidential election (average score 3.5), our strategists are anticipating political volatility to be running high in the final third.
Strategists Anticipate Election Drama
With relatively little concern over the stalemate on Brexit talks, the US election is, of course, the must-watch political event of the fall. In what is likely to be a contentious election season, our strategists clearly project a Biden win (78%), but there is little conviction on how congressional races will fare. It is either “too early to tell” or “your guess is as good as mine.”
Perhaps more significant are thoughts on how any result will be received by the American public. A large number of respondents give reason for concern, with 50% anticipating that the results will be contested and 50% predicting that the election will result in social unrest.
In terms of the political impact on both the economy and the markets, our strategists are broadly in agreement on which candidate will provide the most positive outcomes. The vast majority (75%) believe Biden will be better for global trade. Results are identical for geopolitical risk. And 61% give the advantage to the Democrat on the global economy.
Interestingly, despite giving the nod to Biden on these topics, a majority (58%) of respondents believe a Trump win would be better for equities – not surprising given prospects for lower corporate taxes and a pro-business perception. When it comes to bonds, strategists offer little opinion, which likely reflects the might of the Fed and a view that rates will be even lower for longer, regardless of who sits in the Oval Office.
Obvious Winners and Losers
In line with broad market expectations, strategists see clear winners and losers. Three of their top winners are a clear representation that recent changes will be accelerated by the pandemic. Strategists are unanimous in declaring technology a winner. Similarly, 94% expect healthcare to become an even more strategic sector for policymakers going forward. Stay-at-home businesses are a close third (91%). Most surprising, though, is what the pandemic reveals about the resiliency of ESG (environmental, social, governance) investing.
With ESG investment strategies broadly proving defensive in the first six months of the year, interest in ESG investing has grown substantially, giving this approach a bold proof point that makes it a winner for 91% of strategists. In fact, 75% believe that ESG investing will become more prominent/mainstream as a result of this crisis.
“Looking at investor flows and client appetite, what was largely a European phenomenon looks to have made significant inroads into Asia and the US as well. Add that to the recent strong performance and the fact that many wealth managers are now recommending the (ESG) approach, and I think we have a very strong combination for the future,” states Jens Peers, CEO and CIO of Mirova US.1
With millions staying home and projections for a slow path to economic recovery, traditional entertainment (85%) and travel (83%) rank among the top losers. Energy, which has experienced its own unique challenges since Q1 2020, is also a likely loser for 77% of respondents.
Strategists also see dramatic differences in the impact of the coronavirus on real estate. With many families choosing to leave cities for less densely populated suburbs, the trend toward de-urbanization has made the housing market a winner for two-thirds of respondents. But the work-from-home trend and the shift to online retail that have helped propel the tech sector make commercial real estate the biggest loser of the COVID market according to 94% of those surveyed.
Immediate Solutions. Long-Lasting Consequences.
As the COVID public health crisis escalated into a market crisis, policymakers responded with jaw-dropping levels of fiscal stimulus, while central bankers were quick to implement interest rate cuts and asset purchase programs that helped prevent the market crisis from becoming a new global financial crisis.
Taking the long-term view, our strategists see two significant risks posed by these critical short-term measures. Most prominently, two-thirds see rapidly rising public debt levels as a key risk. Another 42% also see risk in a low yield environment that leaves no safe place for savings.
“One issue that will face the long-term effects of these factors is global retirement security. Whether it’s retirees trying to generate income, pensions working to meet liabilities, or policy makers struggling with funding decisions, low rates and high levels of debt could add up to higher risks,” says Dave Goodsell, Executive Director of the Natixis Center for Investor Insight.
Finally, while we are still clearly in the midst of this pandemic, respondents expect it to take a very long time (36% not before 2022, if ever) before we get back to previous behaviors, with some sectors like working from home and business travel unlikely to ever fully recover (61% in 2021, but with these exceptions).
About the Natixis Strategist Outlook
The Natixis Strategist Outlook is based on responses from 36 experts, including 24 representatives from 14 of Natixis’ affiliated investment managers, 6 representatives from Natixis Investment Managers and 6 representatives from Natixis Corporate & Investment Banking.
- Michael Acton, CFA®, Managing Director, Head of Research, AEW Capital Management
- Carl Auffret, CFA®, Fund Manager, European Growth Equity, DNCA Investments2
- Pierre Barral, Head of Absolute Return Portfolio Management, Natixis Investment Managers Solutions
- Benito Berber, Chief Economist for Latin America, Natixis Corporate & Investment Banking
- Axel Botte, Global Strategist, Ostrum Asset Management
- Michael Buckius, CFA®, Chief Investment Officer, Gateway Investment Advisers
- Craig Burelle, Macro Strategies Research Analyst, Loomis Sayles
- Rafael Calvo, Managing Partner, Head of Senior Debt and Co-Head of Origination, MV Credit
- François-Xavier Chauchat, Global Economist and member of the Investment Committee, Dorval Asset Management
- Isaac Chebar, Fund Manager, European Value Equity, DNCA Investments2
- Elisabeth Colleran, CFA®, Portfolio Manager, Emerging Markets Debt Team, Loomis Sayles
- Mounir Corm, Deputy Chief Executive Officer and Founding Partner, Vauban Infrastructure Partners
- Carmine de Franco, PhD, Head of Fundamental Research, Ossiam
- Esty Dwek, Head of Global Market Strategy, Natixis Investment Managers Solutions
- Alicia García-Herrero, Chief Economist for Asia Pacific, Natixis Corporate & Investment Banking
- James Grabovac, CFA®, Investment Strategist, Municipal Fixed Income Team, Loomis Sayles
- Alexander Healy, PhD, Chief investment Officer and Portfolio Manager, AlphaSimplex Group
- Jack Janasiewicz, CFA®, SVP, Portfolio Manager & Portfolio Strategist, Natixis Investment Managers
- Kathryn Kaminski, PhD, CAIA, Chief Research Strategist & Portfolio Manager, AlphaSimplex Group
- Brian P. Kennedy, Portfolio Manager, Full Discretion Team, Loomis Sayles
- Karen Kharmandarian, Chairman and Partner, Thematics Asset Management
- Ibrahima Kobar, Deputy CEO, Global CIO, Ostrum Asset Management
- Troy Ludtka, US Economist, Cross Asset Research, Natixis Corporate & Investment Banking
- Garrett Melson, CFA®, Portfolio Strategist, Natixis Investment Managers
- Jean-Charles Mériaux, Chief Investment Officer and Fund Manager, DNCA Investments2
- Jens Peers, CFA®, CEO and CIO, Mirova US1
- Alex Piré, CFA®, Market Strategist and Head of Client Portfolio Management, Seeyond3
- Cyril Regnat, Head of Research Solutions, Natixis Corporate & Investment Banking
- Jean François Robin, Global Head of Research, Natixis Corporate & Investment Banking
- Lynne Royer, Portfolio Manager, Head of Disciplined Alpha Team, Loomis Sayles
- Dirk Schumacher, Head of European Macro Research, Natixis Corporate & Investment Banking
- Lynda L. Schweitzer, CFA®, Portfolio Manager, Co-Team Leader of Global Fixed Income Team, Loomis Sayles
- Christopher Sharpe, CFA®, SVP, Portfolio Manager, Natixis Investment Managers
- Nuno Teixeira, Head of Diversified Beta Portfolio Management, Natixis Investment Managers Solutions
- Hans Vrensen, CFA®, MRE, Managing Director and Head of Research & Strategy, AEW Europe
- Chris D. Wallis, CFA®, CPA, CEO, CIO, Senior Portfolio Manager, Vaughan Nelson Investment Management
2 A brand of DNCA Finance.
3 Operated in the US through a participating affiliate arrangement with Natixis Advisors, L.P.
Only SEC-registered affiliates provide advisory services to US Persons and certain of the affiliates advise pooled investment vehicles that are not publicly offered within the US. In no case should this be viewed as an offer by an unregistered affiliate to provide services to US Persons or as an offer to sell, or the solicitation of an offer to purchase, a security that is not registered for sale in the US.
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Equity securities are volatile and can decline significantly in response to broad market and economic conditions.
Fixed income securities may carry one or more of the following risks: credit, interest rate (as interest rates rise bond prices usually fall), inflation and liquidity.
Sustainable investing focuses on investments in companies that relate to certain sustainable development themes and demonstrate adherence to environmental, social and governance (ESG) practices; therefore the universe of investments may be limited and investors may not be able to take advantage of the same opportunities or market trends as investors that do not use such criteria. This could have a negative impact on an investor's overall performance depending on whether such investments are in or out of favor.
This material is provided for informational purposes only and should not be construed as investment advice. The views and opinions expressed are as of July 2020 and may change based on market and other conditions. There can be no assurance that developments will transpire as forecasted, and actual results may vary.