anticipations Monthly april 2009 Written by Philippe Waechter, Chief Economist +33 (0)1 78 40 36 68
Our macroeconomic analysis The global economy is still suffering the consequences of the very sharp shock to activity that occurred in the last quarter of 2008. The available indicators for the first two months of the year suggest a further strong contraction of activity in industrialized countries and very reduced growth levels in emerging countries. Nevertheless, a somewhat more positive outlook may be deduced from the results of business leader outlook surveys for the first quarter of 2009. In the 3rd and 4th quarters of 2008, the sharp deterioration in these outlooks was generalized and all economies were affected by the brutal slowdown in economic activity. Now the situation looks less uniform. In China, business leaders have expressed a slight improvement in their outlook for economic activity, albeit a small one. The aggressive economic policies implemented by governments and the halt in the fall of real estate prices are probably at the origin of this relatively better outlook. In the United States, business leader outlooks have remained stable compared with the last quarter of 2008 at a very low level. The economy is still slowing, but it has not been subjected to any further shocks. GDP is likely to show a further strong contraction in the first quarter of 2009 due mainly to the sharp fall in corporate investment. On the other hand, household spending is unlikely to further depress GDP after two consecutive quarters of sharp contraction. The positive news comes from signs that property prices have stopped falling.
the sharp deterioration in the latter months of 2008. The deterioration is particularly severe in France and Italy. The surveys suggest a 1Q09 GDP contraction nearly as sharp as that of 4Q08 (-1.5% on a non-annualized basis). Household spending will remain very fragile; corporate investment will contract again and exports will contract in response to reduced global demand. In this context, unemployment is likely to continue growing throughout 2009. This lack of Euro-zone autonomy reflects an overdependence on exports, but also a series of asymmetrical negative shocks in different European countries such as the collapse of real estate markets in Spain and Ireland, Austria’s exposure to much weakened Eastern European economies and very weak domestic demand in France. In sum, the more varied outlook expressed by business leaders in different regions of the world in the first quarter of 2009 constitutes an encouraging signal for the future evolution of the global economy. The situation has stopped deteriorating in the United States and is showing signs of improvement in China. This is partly due to the swift implementation of more accommodative monetary and fiscal policies in these countries. However, the most worrying aspect in the global indicators observed so far this year is the further deterioration of Euro-zone activity. In this context, it is highly regrettable that the governments of the European Union are not taking more aggressive measures to bolster economic activity and to interrupt this sharp deterioration.
In the Euro-zone, business leader surveys suggest a further sharp deterioration in outlooks for 1Q activity after
www.am.natixis.com
anticipations Monthly april 2009
Our market analysis Signs of stabilization in the US economy (albeit at a very low level) and the announcement of the new bank rescue plan have fuelled a technical rebound on stock markets. Government bond prices have behaved differently in different countries.
the US equivalent dropped 50 points to less than 2.5% on March 18th. However both markets had lost some of their gains by the end of the month. The maintenance by central banks of low key rates and their purchases of government bonds remain favorable to bond markets.
n Money market In a context of sharp falls in economic growth rates and falling inflation rates (close to 0% in the US and to 0.6% in the Euro-zone, in March, according to the Eurostat flash estimates), central banks are making their monetary policies even more accommodative. In the United States, the UK and Japan, interest rates are now close to zero, leaving little room for further manoeuvre. Their central banks have therefore adopted non-conventional measures by buying long-term government bonds. The ECB on the other hand still has further leverage on interest rates. On March 5th it cut rates by 50 basis points, taking its principal lending rate to 1.50%. It will reduce rates again before June and will very likely adopt other unconventional measures in the meantime – like other central banks – in order to avoid the risk of the recession going too deep or lasting too long.
n Equity markets March saw a net recovery in stock markets after continued contraction over the first two months of the year. They benefited from signs of stabilization of the US economy, the improvement in the Chinese economy and then from the announcement of the details of the rescue plan for the American banking and financial system.
n Bond markets Bond markets have posted varied evolutions in different countries. In the Euro-zone, long-term German yields remained relatively stable. But pressures remained high on bond market yields in the Euro-zone countries weakened by the sharp deterioration of their public deficits and/or the fragility of their banking systems. In the United States and the UK, investors reacted to the implementation of quantitative monetary policies by central banks. The announcement of government bond purchases worth 100 billion pounds by the Bank of England on March 5th and 300 billion dollars by the Fed on March 18th allowed a significant release of the pressure on long-term bond yields. The UK 10-year gilt yield fell below 3% in mid-March vs. 3.63% on March 4, and
n Currency market The dollar weakened vs. the euro during March. It was affected by the Fed’s decision to purchase long-term government bonds and to increase its purchases of debt issued by Fannie Mae and Freddie Mac. This option had already been considered by the Fed back in December but the market was not expecting it to be on the agenda of the Fed's March meeting.
n Commodities Commodity prices were volatile during March. However, overall, global demand weakness should keep prices at low levels.
www.am.natixis.com
Written on 04/02/2009
anticipations Monthly april 2009
Our asset allocation bias We have moved back to “neutral” on equities and remain positive on bonds. Risk categories
Risk subcategories
Tactical allocation*
Commentary
Mar. 09(1) Apr. 09(2)
Fixed income
+
+
We remain "positive" on government bonds. They will benefit from the central banks’ implementations of very low interest rates and unconventional measures adopted to make their monetary policies even more accommodative.
Equities
+
=
Having been positive to benefit from the technical rebound, we take profits and return to a "neutral" position.
United States
+
+
We remain "positive". Yields will benefit from the Fed’s purchase for 300 billion dollars of government bonds for a period of six months.
Euro
+ + = =
We remain "positive". The ECB will most likely cut its key rates again and will probably adopt other unconventional measures.
Japan
+ + =
Corporate
-
=
We have switched to "neutral" with a slight over-weight on the financial sector in view of the slightly better corporate newsflow and the US rescue plan.
United States
+
+
We remain "positive". The signs of stabilization in the US economy at a very weak level and the aggressive measures taken by the Fed should benefit the stock market.
Euro
+
=
We have returned to a "neutral" stance. Economic activity has again slowed in the first quarter of 2009 and we are not expecting any news – particularly with respect to corporate earnings – likely to pull the market upwards.
UK
+ = = = =
= = = =
+
+
Bonds
UK Emerging countries
Euro issuers
Equities
Japan Dollar currencies (against the euro)
Yen Pound Sterling
Commodities
Oil Gold
"Positive": the bond markets will benefit from the central banks’ purchases of bonds. We have switched to neutral because of the reduction of risk aversion and the reappearance of attractive carry opportunities. But we remain negative on Eastern European countries. We remain "positive".
We have returned to a "neutral" position for the same reasons as for the Euro-zone. We remain "neutral". The euro/dollar parity should stabilize. The yen should depreciate under the influence of the sharp deterioration of the Japanese economy and the unwinding of carry operations. The pound sterling should stabilize. The oil price should remain affected by global demand weakness. We remain "positive" due to global uncertainty.
Scale from -- to ++
*weighting gap vs. strategic allocation of an investor
(1) Investment committee on 02/26/2009. (2) Investment committee on 03/26/2009.
Rédigé le 10/06/2008
www.am.natixis.com