The Big Picture: Cash, credit and real estate

After a short, sharp recession (and more rapid rebound than we expected), the question is whether we are now at the start of a new global cycle? We believe so but expect it to be hesitant as rolling lockdowns are enforced and policy support is removed. At this stage of a new cycle we prefer cyclical assets and favour credit and real estate within our Model Asset Allocation. Among defensive assets we prefer cash. Regionally, we are focused on emerging market (EM), Japanese and UK assets.

There remain many uncertainties about the future path of the global economy, not least of which will be the path of Covid-19 infections and deaths as the Northern Hemisphere winter approaches (many countries that have relaxed lockdowns are now having to reintroduce restrictions as infections rise). We are assuming a vaccine will go into mass production within our 12-month forecast horizon but doubt that we will see a return to normal behaviour within that timeframe (if nothing else, we believe that working and shopping habits have changed for good). Policy makers have been generous during 2020 and we suspect policy support will diminish within our forecast horizon. There is a risk that further collateral damage (bankruptcies and unemployment) will reveal itself as government support programmes end (we assume a growth path somewhere between a traditional recovery and that seen after the Global Financial Crisis (GFC)). Finally, let’s not forget the US presidential election on 3 November 2020, where we expect a change at the White House.

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