RBF numérique 2020/10

Banking thrives in a calm and stable environment. After the global financial crisis of 2008, however, governmental authorities undertook a range of necessary measures that had an enormous impact on the funding and the reporting requirements imposed on financial institutions, systemic and specialized institutions alike. The ongoing COVID-19 crisis has further deepened the negative effects of the low interest rate environment, and forces all banks to think broadly, continue to digitalise their businesses, and seek for more alternative income. Smaller banks face the same challenges as their systemic counterparts but continue to believe in their strength to work close to their customers and find tailor-made solutions for their demands.

Despite the pandemic, the long-term paths of slow growth and low inflation remain intact, albeit with greater uncertainty around inflation. The pandemic has triggered even easier monetary policy, although fiscal policy is likely to take the leading role in promoting economic growth in the decade ahead. 
Strong returns from equities and high-quality bonds through the pandemic have left valuations stretched. A traditional 60/40 portfolio of global stocks and U.S. bonds presents a very subdued frontier of potential returns.  However, many other asset classes shine above this low horizon, including European and Emerging markets equities, high-yield and emerging market debt and an assortment of alternative investments. In addition, active management should be able to take advantage of distortions in relative valuations that have been created by years of central bank intervention and momentum investing. 

Construction and real estate activity recovered after the first COVID-19 wave starting in the summer, but the tightening of security measures may again temporarily weigh on activity in Q4. We take into account a fall in house prices in 2020 and 2021 due to the recession weighing on household income. However, the fall in prices remains limited by low interest rates, investor demand and government measures to mitigate the damage to income.