Coffee Break 1/9/2017

The latest macroeconomic indicators have confirmed our asset allocation rationale:

• Higher inflation and stronger growth with the consumer price index increasing faster in Europe, average hourly earnings rising more than expected in the US while consumer confidence reaching new highs in the US and business confidence improving. Furthermore, US earnings are expected to grow by 5% YoY in the Q4, boosted by financials and utilities.
• Positive on euro zone and Japanese equities as both segments outperformed over the past week supported by a perception of receding political risk and weaker JPY respectively.

These are good reasons to maintain our overweight on equities versus bonds and to prefer the euro zone, the US and Japan.

On the fixed income side, despite the fact that we have tactically taken some profit on our duration underweight, we maintain a short duration and have once again further lowered our duration. Separately, inflation-linked bonds remain our strongest conviction, as inflation is expected to increase in the coming months.

Our current investment strategy on traditional funds:

Legend
grey : no change
blue : change

EQUITIES VERSUS BONDS

We are overweight in equities versus bonds:

• The macro news flow is still well-oriented as shown by various sentiment surveys (consumers, manufacturing producers, homebuilders) and supported by a strongly positive market sentiment both in US and Europe. We expect a stronger US growth and believe in a potential US reflation.
• Central banks are decoupling but they mostly keep a dovish stance:
  • The ECB will keep a steady hand given political uncertainties as it decided to extend its quantitative easing at least until December 2017.
  • The Fed tightening cycle is at odds with accommodative policies in Japan, the euro zone and the UK. The Fed increased rates by 25 bps and surprised markets by becoming more hawkish. It has forecasted three interest rate hikes next year.
• As a result of the US elections, the prospect of increased fiscal stimulus has risen considerably, given Donald Trump’s programme. The dose of US reflation is leading market participants to postpone end-cycle anxieties. However, the wide range of possible outcomes of the upcoming Trump presidency includes the risk of policy errors.
• Oil markets continue their rebalancing after the last OPEC agreement. But, greater producer response in the US and the level of the USD could likely weigh on oil prices later on this year.
• Political risk has receded in Europe in December but some issues remain with the ”Brexit” negotiations and the upcoming elections in The Netherlands, France and Germany.

REGIONAL EQUITY STRATEGY

• We have maintained our slight overweight on euro zone equities, as we expect a gradual improvement from the high discount due to political uncertainties.
  • We still have a relative value strategy in favour of the DAX against the FTSE 250.
• We have maintained our underweight in UK equities. A deterioration in domestic UK macro indicators should hit the FTSE250 with significant domestic exposure. We avoid domestically-oriented small and mid-caps and still have a relative value strategy long FTSE 100 against a short FTSE 250.
• We are slightly overweight on US equities. We expect a stronger growth and a rise in corporate earnings in the prospect of post-election reflationary policies and consolidating oil prices.
• We are positive on Japan. The country benefits from an aggressive domestic policy mix, stronger US growth and a weaker currency.
• We have maintained a neutral positioning in emerging markets.

BOND STRATEGY

• We have tactically taken some profit on our underweight in duration and took the opportunity to once again sell the duration.
• We continue to diversify out of low/negative yielding government bonds:
  • We have maintained an overall below-benchmark duration as we expect stronger inflation figures (oil prices, wages) and US fiscal policy easing to push bond yields higher.
  • We have maintained our relative value trade of long Italian yields vs short Spanish yields, as Italian rates continue to tighten as too much pessimism were priced in.
  • We remain positive on inflation-linked bonds. We expect the recent rise in inflation expectations to be sustained as wages and consumer price inflation data could rise gradually (The USA should be the first to be impacted). In addition, upcoming fiscal easing looks likely. This implies a re-rating of inflation protected bonds over the course of the coming quarters.
  • We have reduced our overweight on emerging market debt, both in local and in hard currency terms in the aftermath of the US presidential election as a stronger USD and higher US yields imply downward pressure on emerging currencies which might add up in capital outflows
  • We are slightly positive on high yield, even as the significant spread tightening has reduced the potential, the carry remains attractive.

• In the US, the ISM manufacturing index ended the year on a positive note, rising to a two-year high of 54.7 from 53.2 in November, consistent with an expanding manufacturing sector.
• US non-farm payrolls increased by 156,000 in December, compared with market forecasts of 178,000.
• In the euro zone, the final Markit Composite PMI rose to 54.4 in December from a preliminary reading of 53.9 in November. It is the highest value since May 2011.
• The euro zone Consumer Price Index increased by 1.1% YoY in the December flash reading following a 0.6% gain in November, the fastest pace since 2013. 

EUROPE

European equities started the new year on a positive note with the Stoxx 600 closing at 365, up by 1.1%.

• European stocks were boosted last week by the positive performance of Britain's blue chips (mainly the companies in the FTSE 100), largely on the back of mining stock gains in this commodity-heavy index.
• At the start of the week, bank stocks were supported by more broker upgrades and expectations that the US would continue to increases interest rates in 2017.
• European stocks further rallied at the end of the week after a stronger-than-expected US jobs report.
• At a sector level, Banks, Telecoms and Automobiles outperformed the benchmark (3.79%, 3.18% and 2.46% respectively) while HPC (-1.25%), Utilities (-1.34%) and Retail (-1.78%) underperformed.

US

US equities started the new year on a positive note with the S&P 500 closing at 2277 last Friday (+1.7%).

• US stocks rose for the holiday-shortened week as investors welcomed some good economic data and were looking forward to healthier upcoming quarterly earnings reports.
• The technology-heavy Nasdaq Composite Index outperformed the broader market, helped by strength in biotechnology shares.
• Positive readings on the manufacturing sector, both in the US and overseas, helped stocks recover momentum from a weak end to 2016 when trading reopened last Tuesday.
• At a sector level, Real Estate, Health Care and Financials outperformed the S&P 500 (3.05%, 2.55% and 1.43% respectively) while Consumer Staples (0.19%), Utilities (-0.03%) and Telecoms (-1.64%) underperformed.

EMERGING MARKETS

Emerging markets stocks closed the first week of 2017 up by 2.2%.

• Risk appetite for equity investors was buoyant due to a USD retreat and Chinese government action to stabilize the CNY.
• The offshore-traded CNY rose by 0.9%, its biggest weekly gain, reaching two-month highs after the government were suspected of pushing up overnight borrowing costs to discourage bearish bets on the currency.
• Turkey had a difficult week as the local currency fell to stay near record lows versus the USD. The country is facing sluggish growth and an escalation in military attacks.
• Brazil gained ground after stronger-than-expected Chinese economic figures and higher oil prices boosted demand for commodity related assets.
• At a sector level, IT, Energy and Real Estate outperformed the index (3.55%, 3.39% and 3.08% respectively) while Health Care (1.76%), Utilities (1.69%) and Consumer Staples (0.09%) underperformed. 

RATES

Sovereign markets delivered mixed performances over the week, with Europe underperforming, especially non-core markets.

• Stronger than expected inflation numbers and the important supply pipeline since the start of the year have weighted on euro zone sovereign markets, while front-end linkers continued their strong run.
• Friday's US employment data came out relatively strong, leaving the 6 month moving average payroll growth at 174K while wage growth was higher than expected.
• 10Y US, UK, Japan and German yields stood at respectively 2.41%, 1.36%, 0.05% and 0.28%.
• Spanish and Italian 10Y yields turned higher to 1.95% and 1.53% respectively. 

CREDIT

Very strong performance of high beta names during the week.

• High Grade supply was strong with more than EUR15bn.
• The bulk of issues came from banks regulatory capital (BNP Tier 3, Santander Tier 2, Intesa AT1) and the automobile sector (BMW, FCE, Renault, Valeo).
• Inflows in the asset class were over EUR 433mio.
• Sub-sector performance: EUR HY -18bp; EUR Hybrid Non-fin -14bp; EUR sub-insurance -6bp and EUR banks LT2 -3bp.

FOREX

Oil and commodity-related currencies were the gainers of the week.

• AUD and NOK were the main winners last week.
• The USD weakened due to more scepticism in the FOMC minutes about Donald Trump's fiscal policy boost. 

COMMODITIES

Over the past week, commodities were slightly positive with the GSCI Light Energy up by 0.8%.

• Oil headed for a fourth weekly increase (WTI +2.2%, Brent +0.2%) after US crude stockpiles declined more than forecasted. Kuwait and Saudi Arabia also signalled that they were maintained their pledges to cut production.
• Gold gained more than 2% and silver 3.4% thanks to buying pressures since the beginning of the year and the recent fall of the USD.
• Soft commodities remained well-oriented with cocoa up by 6.2%; coffee up by 5.25% and sugar up by 5.6%. 

WEEKLY MARKET OVERVIEW

UPCOMING FACTS AND FIGURES