Political situation: On 13 January, Italia Viva – a minor coalition partner led by former Prime Minister Matteo Renzi – pulled out of the ruling coalition, leaving the government short of a majority in the Senate. However, we believe that snap elections are unlikely for now. In our view, the most likely scenarios are: Prime Minister Giuseppe Contecould seek to win a confidence vote,with support from parties both inside and outside the ruling majority and also unaffiliated lawmakers (Gruppo Misto);Conte could step down, triggering a new round of talksthat could eventually lead to a new administration, headed by Conte himself or another Prime Minister, with support from the same alliance; or a caretaker administration could be appointed to manage the government until the next election.

We analyze the portfolio choices of approximately 913,000 active participants in employee saving plans in France. Looking at the cross-section of equity exposure, we find that the inclusion of responsible equity options in the menu of available funds is associated with a 2.1% higher equity allocation by plan participants.

In the hunt for yield, some years ago European investors started to allocate part of their credit exposure to dollar assets. However, many then put a stop to this diversification due to high hedging costs. In the context of the Covid-19 outbreak, the Fed cut rates to post-Lehman lows. Consequently, euro and dollar interest rates converged significantly, reducing hedging costs and making a case for broadening the investment universe from a European to a global base more attractive.

As the Q420 is now closed, we confirm the “financial recovery regime” as our central scenario for 2021 with a higher conviction than in Q320. We expect better corporate fundamentals at a global level going forward. The rebound of EPS growth will eventually validate current asset price levels in the context of low interest rates. This explains our cautious optimism for the coming quarters. We have also analysed the sustainability of the ongoing risk rotation from Credit HY to value/cyclical equities. We confirm our constructive medium-term view with a continuation and maturing of the financial recovery regime.

The complexity and fragility of European institutions have contributed to maintaining a specific political risk premium on European assets, including the euro. But institutions were ultimately strengthened when negotiators agreed in July to launch the New Generation EU package. The euro’s recent appreciation may be an early sign of decline in this “risk premium”. Foreign investors may therefore want to rebalance their portfolios in favour of Eurozone assets, which could push the euro higher. Should the euro
appreciate too fast, the ECB would not stay on the side-lines.

Following the elections in Georgia, the Democrats have a very small majority in Congress. To facilitate governance, the new administration is likely to continue to govern using Executive Orders (EOs). Their use has grown over time, and they have become a full-fledged instrument of governance.

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The Eurosystem started its QE in March 2015.

2020 has been an unprecedented year in modern history, with the Covid-19 pandemic leading to the deepest global recession post World War II that has affected the most countries simultaneously since the 1870s (World Bank). This big shock is not going to reverse completely, and the old normal will not return as it used to be.