Financial markets and economies around the world are still heavily affected by the corona crisis, but we have now entered a phase where the politicians’ and central banks’ assistance packages really have to get to work as global economies begin to up the pace of reopening.
We are therefore also changing our investment strategy a little here at Danske Bank. We are further increasing our share of US equities – where we already had an overweight – at the expense of European equities, which we were already underweighting. The shift in allocation is due to several reasons:
US faster to act
Looking first at the US economy, politicians in the US have again taken greater and more resolute action than we have seen in many other parts of the world. The US central bank, the Fed, has also been very quick to rush through assistance packages – and on a scale hitherto unheard of. The US labour market is extremely flexible, so despite sharply rising unemployment we expect the labour market to adjust and prove efficient as the US opens up again and many Americans begin to restart in their jobs relatively quickly.
The sum of these factors is of course positive for the US economy, which we very simply expect will be better positioned for growth than most other countries in the world.
Looking at the composition of the US equity market, it too is a little different to many other markets. IT, in particular, is heavily represented, and this is still a sector we have great expectations for – in some cases reinforced by the corona crisis, which has increased corporate appetite for technical solutions that would stand them in good stead for any similar crisis in the future. Moreover, many of the digital habits we have acquired or expanded on during the corona crisis will undoubtedly stick.
More sceptical about Europe
So, we are increasing the weight of our US equities and, as mentioned, we do so at the expense of European equities, where the story is nearly the opposite.
European politicians have had difficulty agreeing initiatives that could support growth in Europe. While governments have been relatively effective at national level, dissent in the EU, in particular, has been pronounced, and a North-South divide has emerged. This means Europe is slower to act and often not as decisive as we have seen in the US – and despite pledges from the European Central Bank (ECB) to buy up huge amounts of bonds, we can see that investors have not fully bought into this. At any rate, Italian bond yields have not managed to decline to pre-corona levels.
Brexit a further uncertainty
Brexit, too, is lurking in the not too distant future. The plan is for the UK to leave the EU at the end of the year when the current transition period expires. However, the corona crisis has complicated negotiations on the future terms of the relationship between the EU and the UK, which should have been in place by June.
We therefore expect Brexit uncertainty to grow in the time ahead, and that will tend to affect European companies and, not least, their appetite for investment. Given this and the slightly lower pace of growth in Europe, we estimate that, overall, US equities are the better pick going forward.
As regards our overall strategy, we maintain a modest overweight in equities in general – in other words, we have a slightly higher share of equities than we expect to have in the long term – but now with an allocation that favours US equities even more than European equities.