January 2011
Anticipations Monthly
Philippe Waechter Chief Economist at Natixis Asset Management
Having grown at a more modest pace since the summer, the global economy picked up speed late in 2010. Surveys of business leaders revealed fast-expanding activity in all regions except Japan. This acceleration, coming after the summer’s pause, was more a reflection of endogenous business factors than a response to fiscal policy stimulus, perhaps suggesting the growth process is more autonomous and sustainable than previously thought.
o Our macroeconomic analysis In developed countries however, the revival has been too weak to significantly improve the jobs market. This has led central banks to maintain their highly accommodative monetary policies. In emerging economies, however, the strength of the recovery has put pressure on productive capacity, forcing central banks to respond with somewhat tighter monetary policies to bear down on inflationary pressures. The US is moving back to a more robust domestic trend. Household consumption accelerated in the fourth quarter and looks likely to settle at an annualized 4%, having been stuck at 2% since the recession ended in June 2009. Surveys of business leaders also show sustained growth in activity. But the upturn looks fragile, given the still high unemployment rate and risks of deflation. Against this backdrop, the Fed will need to keep monetary policy very accommodative. The 2011 budget deal struck between the White House and Congress, which foresees cuts in salary charges (notably social security payments), will act
as a strong boost for household demand and help sustain the economy’s expansion. In Asia, activity is accelerating again in South Korea and Taiwan in the wake of China’s rebound. Chinese growth had faltered in spring and early summer. Gradually, though, the country returned to a stronger domestic growth trend. This is good for the whole region. Only Japan is missing out on the global improvement, hampered by slowing exports and the end of fiscal measures to encourage household spending. That said, greater dynamism among its Asian neighbors should gradually allow Japan to get growth back on track. In Europe, surveys of business leaders identified a clear improvement in manufacturing. But the story remains mixed. Germany stands out from the rest of the zone with strong growth (3.6% in 2010) driven by its dynamic export performance. Exports are reaping the benefits of strong Asian demand leading to a virtuous circle. Sharply rising overseas sales have prompted a renewal of investment, improvements in the jobs market and hence stronger consumption. In France and Italy, recovery is much slower, too slow to restore pre-crisis levels of growth. Finally, the so-called peripheral nations are returning to a slightly more favorable trend, except for Greece. Economic activity has ceased to deteriorate and stabilized in Ireland and Spain. In Portugal, we are seeing substantial growth. But all these countries remain highly vulnerable, due to the size of their public sector deficits. Progress is being made on developing an institutional framework within which the euro zone can work and which should greatly reduce the chance of current circumstances being repeated. This will involve a greater mutualization of risks and closer scrutiny of the situation in each country to avoid lasting and costly divergences.
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Anticipations Monthly / January 2011
o Our market analysis n Money markets The sharp rise in commodity prices should only have a short-lived impact on inflation. Risks of an inflationary take-off are, in our view, limited even though the 2011 rate will be rather higher than forecasters were expecting a few months back. Monetary policies will therefore remain highly accommodative, due to the fragility of the recovery and inflation that should remain under control in the medium term. In the US, the Fed reaffirmed at its December meeting that it would be keeping a zero-rate policy for an extended period and confirmed that it would buy Treasury bonds. The thinking is to put downward pressure on yields along the whole length of the curve. In the euro zone, at the ECB’s January 13 press conference, Jean-Claude Trichet said that ECB rates remained at an appropriate level. While his comments were rather more focused on inflationary risks, he nonetheless expected inflation to move back below its 2% target rate by yearend. It is this inflationary blip that prompted the recent rise in euro zone interest rates. The ECB continues to buy sovereign bonds issued by peripheral nations. Its aim is to enhance liquidity in the markets for these countries’ debt and so to allow better transmission of monetary policy. The ECB is also continuing to pump in plentiful liquidity, an essential lifeline for part of the euro zone’s banking sector. No change is expected in this policy, at least until late spring and publication of the latest stress tests regarding the solidity of the banking system.
Bond yields in Europe’s peripheral economies have eased slightly since January 12 thanks to the successful completion of their bond auctions. Discussions also seem to be nearing a conclusion on the solution that will be put forward as a way to resolve recent turbulence.
n Equity markets Equity markets rose on both sides of the Atlantic. The publication late in the year of signs pointing to a pickup in global activity against a background of continuing accommodative monetary policies allowed markets to recover. Investors, particularly in Europe, were also reassured by the successful bond issues by peripheral states during January. In general, risk aversion seems slightly less prominent.
n Currency markets The euro gained little from January’s successful debt auctions in Portugal, Spain and Ireland. The single currency continues to be held back by the difficulty governments are having in taking concerted action on a long-term solution to the sovereign debt crisis.
n Commodities Commodity prices continued to rise, driven by ongoing strong demand from emerging markets amid major inflows of cash.
n Bond markets Having made rapid gains since the start of November, bond yields stabilized as from mid-December before taking off again from mid-January in Europe. The first rally reflected two circumstances. First, the announcement of the Federal Reserve’s Quantitative Easing strategy. The scale of purchases was slightly lower than expected, prompting arbitrage at the time the announcement was made. Second, the announcement of the budget deal which improved the growth outlook for the US. European rates followed this rally. Since the middle of January, however, European markets have moved into a phase of upside expectations and this has driven a rapid rise in interest rates. Such a reaction might suggest that the ECB will move quickly to tighten monetary policy. This is not the scenario expected at Natixis AM, taking the view that the ECB will hold its policy rate at 1% throughout 2011.
www.am.natixis.com
Written on 25/01/2011
Anticipations Monthly / January 2011
o Our current allocation preferences Risk categories
Risk subcategories
Tactical allocation*
Commentary
Dec. 10 (1)
Jan. 11(2)
Fixed income
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We remain “neutral” on the European bond market. Pressure on long yields driven by expectations that growth will be faster than previously discounted will be mitigated by the continuation of accommodative monetary policies.
Equities
+ = = = + =
+ = = = + =
We remain “positive”. The improved business outlook should ensure satisfactory earnings newsflow over coming months.
Corporate inv. grade
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+
United States
+ + + + = = = + +
+ + + + = = = + +
United States Euro-zone Fixed income
UK Emerging markets Japan
Euro issuers
Equities
Euro-zone UK Japan
currencies (against the euro)
Commodities
Dollar Yen Sterling Oil Gold
We remain “neutral”. The Fed’s commitment to keep rates low for an extended period will limit the tensions generated by the stronger growth outlook. We remain “neutral”. Through contagion, the euro zone should see a similar trend in its bond market. We remain “neutral”. Through contagion, the UK should see a similar trend in its bond market. We remain “positive” due to the scale of capital inflows. We remain “neutral”. The exacerbation of deflationary pressures and fragility of the recovery will lead the Bank of Japan to keep rates near zero. We remain “positive”. Spread valuations are attractive.
We remain “positive” as markets price in a stronger growth outlook. We remain “positive”. An improved earnings outlook and still attractive valuations should be good for stock markets. We remain “positive”. We remain “positive” despite the current fragility of the economy. Japan should benefit from stronger global growth, particularly in Asia. The euro/dollar exchange rate should stabilize. The yen should stabilize against the euro. Sterling should stabilize. We remain “positive” based on more vigorous demand. We remain “positive”.
Scale from -- to ++
*weighting gap vs. strategic allocation of an investor
(1) Investment committee as of 25/11/2010. (2) Investment committee as of 06/01/2011.
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Written on 25/01/2011
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