Aviva Investors, the global asset management arm of Aviva PLC, expects the economic recovery that began in May to continue in the rest of the year and into 2021. Although further waves of COVID-19 virus infections have emerged, they should be successfully countered by limited and targeted restrictions on activity, avoiding the need for the re-imposition of full national lockdowns.
As a result, downside risks to activity have diminished since the summer, while the upside case would be further enhanced by the eventual development and distribution of effective vaccines in early 2021, alongside extensive monetary and fiscal policy support. While there is considerable uncertainty about timings, the contours of a post-COVID “new normal” should come into sharper focus in coming quarters.
The ongoing economic revival will rely on continuing policy support in the form of loose monetary policy – conventional and otherwise – and generous fiscal support and stimulus for both businesses and workers. If sustained, the combination of loose monetary policy – which is increasingly geared to achieving higher inflation than in the past decade – and expansionary fiscal policy has the potential to bring long-lasting material changes for economies and global financial markets.
Michael Grady, head of investment strategy and chief economist at Aviva Investors, said: “The combination of brighter economic prospects, receding risks from COVID-19 and continued policy support, has led us to take a more positive view towards risk assets. We prefer to express more risk in credit markets, with an overweight view in global high yield and US investment grade credit. Our previously negative view on global equities is closer to neutral overall.
“Relative valuations and the form of the cyclical recovery favour Europe and Emerging Markets over the US and Japan.
“The decline in sovereign bond yields globally makes them less attractive, especially as an effective risk-reducing asset in our portfolios. While we have a neutral view overall, we balance overweights in the US, Italy and Australia with underweights in core Europe.
“Arguably the most significant change in our asset allocation view has been to move to an underweight position in the US dollar against key G10 currencies, where we prefer to be overweight both the Euro and the Yen.”
