November 2010
Anticipations Monthly
The macroeconomic signals were more positive in October. The survey indicators in the US, China and India improved considerably, thereby reducing the risk of a double dip.
o Our macroeconomic analysis Philippe Waechter
In Europe, the indicators were more mixed, with variations between different countries. Overall, they were less dynamic, though there does not appear to be a risk of a sharp drop in activity levels. Chief Economist at Natixis Asset Management
In the United States, the business leader surveys for October pointed to a recovery, including for SMEs, which may be seeing firmer activity levels. The key point emerging from the surveys is the increase in new orders in October after several months of falls. Nonetheless, and despite an improving labor market, households remain concerned about the economic environment. The absence of a rapid rebalancing of the labor market is the reason behind the Fed’s new strategy. In Asia, the picture is also mixed. On one side, there is a clear recovery in activity in China, mainly linked to the dynamism of the domestic market. The goal of re-balancing the growth process was confirmed at the Communist Party congress this fall. However, because the impact of the recovery is taking time to feed through
to China’s neighbors, they are still suffering as a result of the slowdown in growth of the Chinese economy at the beginning of the summer. The activity indicators are less robust than they were a few months ago. Meanwhile, there has also been a decline in Brazil since the summer. That may reflect the hiatus and uncertainty relating to the presidential elections following President Luiz Inacio Lula da Silva’s two consecutive mandates, which saw a major improvement in the performance of the Brazilian economy. It may also reflect, as in several Asian countries, the convergence towards a more sustainable growth path in the medium term. Given the rapid pace of the recovery, these factors may reduce the risks of detrimental imbalances throughout the growth cycle. In the eurozone, the publication of the GDP growth figures confirmed the theory that the recovery peaked in the second quarter of 2010. In the third quarter, eurozone GDP growth was 0.4% (1.6% annualized), compared with 1% (4% annualized) in the second quarter. This slowdown was evident in Germany (0.7%, versus 2.3%, not annualized) and France (0.4%, versus 0.7%, not annualized). Over the month, the most pertinent surveys in terms of activity showed robust levels of activity in the manufacturing sector, but lower levels for services. This may relate to the ability of the manufacturing sector to benefit from global trade, while services are more dependent on domestic markets. In October, the UK’s coalition government adopted a particularly austere fiscal strategy. It aims to reduce the imbalance in the UK public finances quickly, but risks weakening the country’s recovery.
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Anticipations Monthly / November 2010
o Our market analysis n Money markets
n Equity markets
From mid-October, after the minutes of the September meeting of the Fed’s Monetary Policy Committee were published, the perception of the financial environment changed. In these minutes, the Fed let it be understood that it planned to put in place an even more accommodative monetary policy. Given the lack of dynamism in the economy and the fact that the shock of the recession that began at the end of 2008 has not yet been fully absorbed, the Fed believes it needs to implement additional measures. Since it cannot reduce interest rates any further, it has opted to make large-scale purchases of US Treasury bonds (USD 600 billion before the end of the second quarter of 2011), with the aim of depressing all segments of the US yield curve. The goal is to boost growth by bringing yields down and influencing the asset switching of economic agents.
In the environment described above, the equity markets have held up reasonably well. Company results have been positive. This is the reason behind the good performance of the equity markets, which has offset the most significant macroeconomic uncertainties.
The Fed’s change in strategy has yet to be reflected in alterations in policy or additional measures being adopted by other central banks. The Bank of Japan had already lowered its reference rate to the [0-0.1%] range, instead of 0.1%, and has announced the purchase of JPY 5 trillion in Treasury bills. The Bank of England, which may implement a similar strategy to the Fed, has not yet taken action and the ECB has not changed its policy, reiterating that it would provide any necessary liquidity over the next few months.
n Currency markets In taking this direction in its monetary policy, the Fed has clearly indicated and confirmed that it will not raise interest rates for a long time. As a result, asset switching has benefited the currencies of countries with higher interest rates. This has mainly meant the currencies of emerging countries. Capital flows have increased to these regions, causing local currencies to rise and arousing the concern of the authorities. These capital flows could also leave in these regions in the near term, which would have a destabilizing effect. Brazil and Taiwan are among the countries to have put in place “constraints”, often in the form of taxes on transactions, so as to limit the risks of volatile inflows and outflows. Faltering confidence in the dollar has now extended to the euro.
n Bond markets There were a lot of questions raised in the period leading up to the Fed’s announcement. These questions concerned what form the Fed’s intervention would take, the amount involved and the duration, and how effective such action would be. These are the factors that led to fluctuations in yields in both the United States and the eurozone. Meanwhile, the situation of the peripheral countries remains fragile in the eurozone. These economies suffered a severe shock during the crisis, and their growth models have been affected. Activity levels have weakened, unemployment has risen sharply and the public finances are in a parlous state. The recovery in activity has been weak and improvements to public finances insufficient, raising questions over the ability of the peripheral countries to meet their commitments. Institutional co-operation between each country and Europe will be necessary to avoid the economy becoming more fragile or additional constraints being placed on investors.
n Commodities The Fed’s change in strategy has had an impact on commodities prices. There are two factors to underline here: • Demand for commodities is rising as the recovery in emerging countries continues to boost their manufacturing sectors. This more robust demand has been seen notably for oil and copper. • In this environment, the expectation that interest rates will remain close to 0% for some time to come is a permissive condition for taking positions in these markets. This situation has caused prices to rise. As for food commodities, unfavorable production conditions can create upward price pressure.
The solutions to these problems can only be found at European level. Written on 12/11/2010
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Anticipations Monthly / November 2010
o Our curent allocation preferences Risk categories
Risk subcategories
Tactical allocation*
Commentary
Oct. 10 (1)
Nov. 10 (2)
Fixed income
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We are now “positive” on interest rates. This reflects the consequences of the Fed’s quantitative easing strategy, which will depress yields in all segments of the curve.
Equities
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We remain “neutral”: the rise in share prices has been offset by the significant macroeconomic uncertainty.
Euro-zone
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We are now “positive”: the impact of US policy will be considerable, and the uncertainty over the peripheral countries will give the eurozone’s reference rate a “safe haven” quality.
UK
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+ + +
We are “positive”: the Fed’s policy and the anticipation of a possible move by the BoE has prompted us to take positions.
Corporate inv. grade
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+
United States
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United States
Fixed income
Emerging markets Japan Euro issuers
Equities
Euro-zone UK Japan
currencies (against the euro)
Commodities
Dollar Yen Sterling Oil Gold
We are now “positive”: the Fed’s action will push down US yields, particularly at the short end of the curve.
We are “positive” as capital inflows remain substantial. We are now “positive”, notably on the softening of the BoJ’s policy.
We remain “positive” as spreads are attractive.
We are “neutral”. Despite the strong upward trend in place since the end of the summer, concerns have not been assuaged. We are “neutral”, as the macroeconomic uncertainties make stock re-rating unlikely. We remain “neutral”. We remain “neutral”: no more uncertainty surrounding Japan. We are “negative”: the Fed’s strategy has weakened the dollar. “Neutral”: we expect the yen to stabilize against the euro. “Negative”: sterling is weak. “Positive”: demand has strengthened. We remain “positive”.
Scale from -- to ++
*weighting gap vs. strategic allocation of an investor
(1) Investment committee as of 30/09/2010. (2) Investment committee as of 28/10/2010.
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Written on 12/11/2010
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