june 2009
anticipations Monthly
Written by Philippe Waechter, Chief Economist of Natixis Asset Management
Our macroeconomic analysis May saw a growing number of positive signs with regard to the global economy. They can particularly be seen in household and business surveys but, with the exception of Asia, are not yet wholly reflected in hard economic numbers. In the US and Europe, economic activity continues to contract, but at a more restrained pace. While the current situation remains fragile, the expectation of a marked improvement in the overall climate bodes well for the performance of the global economy. In the US, the pace at which output and the workforce are contracting has eased. Surveys in May once again showed signs heralding an economic upturn. The key point is the rise in new industrial orders, a first since November 2007. Given the lower inventories, this rise in orders will result in increased output. The situation could thus improve faster than had been expected just a few weeks back. At the same time, the recent recovery in household sentiment, and more particularly in their expectations, is a good indicator of changes in their behavior. The economic upturn should thus be seen from this summer thanks to the aggressive economic policies put in place by the government and the Federal Reserve.
In China, industrial output has improved since the start of the year, having significantly slowed in the second half of 2008. It goes hand in hand, from the standpoint of business leaders, with a more positive economic outlook for the coming months. China's internal momentum played a major part in this economic improvement, something that is beginning to spread to the other countries in the region. In the eurozone, GDP fell very sharply and deeply in Q1 2009: -2.5%, at non-annualized rates following -1.8% the previous quarter. This fall can be seen across all areas of demand: household spending, business investment and exports fell. Inventory reduction accentuated the fall. Surveys of business leaders in April and May were slightly more optimistic but remain mixed. They all point to a likely bottoming in Q1, but the range of responses suggests that economic strengthening is limited and patchy across Europe. Weak household spending, the strength of the euro and the shocks experienced in Europe (Spain, Ireland and even Austria) all represent drags on economic performance. In addition, the various government stimulus plans seem to have had limited economic impact. The return to growth in the eurozone will take longer than in the US.
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anticipations Monthly june 2009
Our market analysis Indicators suggesting an improvement in the global economy resulted in a marked fall in risk aversion. Investors are once again favoring risky assets (equities, corporate bonds) over assets that are perceived as less risky (such as government bonds).
n Money market Given the absence of inflationary pressures, central banks will keep their interest rates very low in order to stimulate economic activity. With rates at close to zero in the US, UK and Japan, they will increase the effectiveness of their policy by continuing to buy up government bonds or other assets, thereby directly injecting liquidity into the economy. In the Euro-zone, on May 7, the ECB cut its main refinancing rate by 25 basis points to 1%. At the June 4 press conference, Jean-Claude Trichet did not absolutely rule out a further rate cut. Nevertheless, despite the growth outlook for 2009 and 2010 being revised sharply downwards, the likelihood of such a move would now appear to have receded significantly (possibility mentioned only in the event of a crisis). At the same press conference, the ECB also revealed details of the purchase of â‚Ź60 billion in covered bonds. Unlike in the US, Japan and the UK, the goal of this program is not to directly increase monetary policy effectiveness but rather the liquidity of this market, critical for financial and banking institutions. In money markets, the extreme stress placed on interbank rates in early fall following the collapse of Lehman Brothers has eased considerably. These markets are now much more robust.
n Bond markets Bond markets recently felt the impact of asset switching by investors into risky assets. Long rates thus rose on both sides of the Atlantic. The outlook for a global economic recovery has led investors to favor risky assets over government bonds. This asset switching resulted in a marked rise in long-
term interest rates; a rise that was moreover accentuated by investor concerns regarding the financing of the US public deficit, which is expected to reach 13.1% of GDP in 2009. Tensions on long rates should nevertheless remain limited above and beyond the impact of this asset switching given the lack of inflationary pressures, the holding of key interest rates at very low levels by central banks and the excess of private savings.
n Equity markets Equity markets rose once again in May. Investors were reassured about the situation in the US banking system with the publication of the results of the stress tests and the outlook for a faster US economic recovery than expected. The CAC 40 index thus raised +3.7% over the month with the S&P index up +5.3%.
n Currency market The dollar fell against other currencies in May. Beyond the technical impact of dollar commitments of many banking and financial institutions around the world, the dollar had benefited from its safe haven status during the worsening of the financial crisis. The recent change in havens, the reduction in risk aversion and continued concerns regarding the strategy of US authorities led investors to reduce their dollar exposure, thereby undermining its value.
n Commodities Despite weak global demand and high inventories, oil prices rose sharply to over $65 per barrel at the end of May from $50 at the end of April. This movement reflects strong speculation driven by improved expectations regarding economic activity. However, it is well ahead of reality on the oil market.
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Written on June 18, 2009
anticipations Monthly june 2009 Our asset allocation bias We're moving to "neutral" on the equity markets and staying "neutral" on the bond markets. Risk categories
Risk subcategories
Tactical allocation*
Commentary
May. 09(1) June 09(2)
Fixed income
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We are remaining "neutral" during this transition phase of switching out of the bond market into risky assets. The continuation of very flexible policies by central banks and the absence of inflationary pressures should keep rates at around their current levels.
Equities
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We have switched to “neutral”. Whilst the information coming out on the current situation remains worrying (corporate results in particular), the outlook has improved substantially.
United States
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We remain “neutral”. Following the correction, particularly at the end of May, long rates should remain relatively stable.
Euro
= = = =
We remain “neutral”. The likelihood of a further cut in ECB rates now seems to have receded considerably.
Japan
= = = =
Corporate
+
+
We remain "positive" given the lower investor risk aversion, the improved economic outlook and attractive valuations.
United States
+ = = = = = =
= = = = = = = + =
We have switched to “neutral”. Markets seem to have priced in a likely end to the US recession from the summer and valuations are not very attractive.
Fixed income
UK Emerging countries
Euro issuers
Equities
Euro UK Japan Dollar
currencies (against the euro)
Yen Pound Sterling
Commodities
Oil Gold
We remain "neutral" with the Bank of England having to keep its key rate at 0.5% and continue its quantitative measures. We remain “neutral”. We remain “neutral”.
We have switched to “neutral”. If the economy continues to contract at a high but slower pace, then the improved economic outlook bodes well for corporate results in particular. We have switched to “neutral”. The market should consolidate following the marked rebound seen since March. We remain “neutral”. “Neutral”: the euro/dollar exchange rate should not change much. “Neutral”: the yen should stabilize against the euro. “Neutral”: sterling should stabilize. We are switching to "positive": speculators are not likely to just go away. We remain “neutral”.
Scale from -- to ++
*weighting gap vs. strategic allocation of an investor
(1) Investment committee on 04/30/2009. (2) Investment committee on 05/28/2009. This document is intended for professional clients. None of the information contained in this document should be interpreted as having any contractual value. This document is produced purely for the purposes of providing indicative information. It constitutes a presentation conceived and created by Natixis Asset Management from sources that it regards as reliable. Natixis Asset Management reserves the right to modify the information presented in this document at any time without notice. This document does not in any way constitute a
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