July 2010
Anticipations Monthly
o Our macroeconomic analysis After a period of acceleration, global economic activity has entered a new phase. It continues to grow but at a slower rate.
In Asia, evolutions remain strong but are no longer accelerating as rapidly as in Chief Economist at Natixis the first few months of 2010. Asset Management Chinese GDP has slowed and the business confidence indicators reflect more moderate growth in activity. Nonetheless the region continues to make a major contribution to global economic growth via the significant knock-on effects linked to trade. Philippe Waechter
In Japan, the acceleration seen in the first half is unlikely to be sustained, as indicated by the Tankan survey of business leaders. Although marked by greater optimism, the Japanese situation remains dependent on the immediate geographical environment. In Latin America, activity growth is also robust. In Brazil, year on year the GDP grew by more than 11% during the first quarter. In the United States, the situation of companies was subject to significant strains during spring time. The change witnessed early this summer resulting in the easing in these strains makes the level of activity more bearable.
Judging by the first regional surveys in July, companies are becoming more nervous. The potential risks are linked to slower economic growth. This uncertainty which can be seen, particularly, in the employment market is prompting more erratic behavior from households and has increased the fragility of the real estate market since the ending of the tax credit in April.
In the Euro zone, the macroeconomic indicators point to relatively rapid growth in activity during the second quarter. This reflects Europe’s greater participation in the global economic dynamic. Nonetheless, towards the end of the quarter, the signals coming from the business confidence surveys appeared less positive than early in the spring, raising question marks about the outlook for the year end. The pick-up in activity has enabled the employment market to stabilize as seen in the first quarter statistics and the surveys carried out in this market. Consumer behavior, however, remains cautious since the uncertainties have not gone away. These notably concern the impact of fiscal consolidation strategies to be implemented in the coming months. The aim of governments, principally in Europe, is to return to a deficit to GDP ratio of below 3% by 2013-2014. This change in fiscal policy should enable the stabilization in the public debt by 2015-2016 but suggests a rapid reduction in public spending which could impact economic activity. Previous successful fiscal consolidation exercises involved a longer adjustment period (5 to 6 years) and, moreover, took place in a specific environment of sharply lower long-term interest rates (prompting arbitrages in favor of consumption) and marked currency depreciation, thus leading to renewed competitiveness. These conditions which undeniably underpin the economic growth during the fiscal consolidation period are not, however, currently in place.
www.am.natixis.com CORPORATE AND INVESTMENT BANKING / INVESTMENT SOLUTIONS / SPECIALIZED FINANCIAL SERVICES
Anticipations Monthly / July 2010
o Our market analysis n Money Markets In this macroeconomic environment, the central banks are very cautious even if their reactions are different. • In the emerging countries, the strong growth in economic activity was accompanied by inflationary pressure with, at times, a real acceleration in inflation rates, like in India and Brazil. In this situation, the central banks tend to take a more hawkish tone on monetary policy. In India, Korea, Taiwan and China, but also in Brazil and Peru, we have seen less accommodative monetary policies, a policy shift enabled by budgetary policies which still have significant room for manœuvre. • In the developed countries, the situation is very different. The inflation risks are limited due to the absence of any strain on productive capacity. There will thus be no rapid changes in monetary policy especially since the adoption of fiscal consolidation programs, particularly in Europe, do not encourage such policy shifts as they would involve an additional risk to growth. The first moves relating to a change in monetary policy will thus not be seen before 2011.
n Bond markets
These strains and uncertainties have gradually receded although interest rates are yet to return to pre-crisis levels for the countries concerned. This easing in tension is the result of all the measures implemented last May by European policy makers, the ECB and the IMF to support the countries with difficulties. The bond markets have thus been driven by the perception of no rapid shift in monetary policy, the absence of inflation in the coming months and a more marked risk differential between countries, particularly in the euro zone.
n Equity markets This volatility and uncertainty in the bond markets have, in turn, been reflected in significant equity market volatility. Equity market valuations remain at relatively low levels due to the expectations on earnings. However this valuation argument for the positions taken in the equity markets is being tested, in the short term, by more global concerns. Furthermore, after three years of crisis, risk aversion is still very high, which tends to result in relatively rapid asset allocation arbitrages.
During the past few weeks, financial markets have experienced periods of significant volatility. The investor's feeling has veered between the bullishness driven by good corporate earnings figures reflecting the recovery in economic activity since the beginning of 2009 and bearishness promoted by the different areas of uncertainty.
n Commodities
This uncertainty has two dimensions:
In the currency market, the euro exchange rate has seen significant fluctuation in the past few weeks. At the height of the crisis in the European markets, the euro traded below 1.2 against the dollar. This was a positive factor when it came to the adjustments within the euro zone and the currency’s recent re-appreciation is a concern.
• The first reflects perception on the activity outlook and thinking that the growth trend could be less robust in coming months; • The second can be seen in the financial market with the risk differential between countries, particularly within the euro zone. Questions about public finances have been its manifestation in the European market, resulting in very different interest rate profiles. In Germany and France, government bonds have been perceived as safe havens, with yields falling in recent weeks. The risks associated with Greece, Spain and even Portugal, however, have increased and the yield spreads on their government bonds widened very significantly, particularly in Greece.
The global uncertainty is also reflected in the very high gold price.
n Currency markets
The change in the Chinese Yuan peg has yet to have any major repercussions.
Written on 15/07/2010
www.am.natixis.com
Anticipations Monthly / July 2010
o Our curent allocation preferences Risk categories
Risk subcategories
Tactical allocation*
Commentary
June 10 (1)
July 10 (2)
Fixed income
=
=
We remain "neutral" on the reference bond markets. Monetary policies are stable and the inflation risk reduced. We remain very cautious on the peripheral markets.
Equities
+ -
+ =
We remain "positive" based on the low valuation of markets with regard to corporate earnings.
Euro-zone
=
=
We remain "neutral". The injection of significant liquidity has enabled the Euro-zone bond market to stabilize.
UK
= =
= = =
Corporate inv. grade
+
+
We remain "positive". The spreads valuation is attractive.
United States
+
+
We remain "positive". The corporate earnings season should have a positive impact.
Euro-zone
+
+
We remain "positive". The factors working in favor of the equity market (improved earnings prospects, valuation level) are still intact and should be supportive. We are maintaining our preference for cyclical stocks.
UK
= = + = = = +
+ + = = = = +
United States
Fixed income
Emerging markets Japan Euro issuers
Equities
Japan
currencies (against the euro)
Commodities
Dollar Yen Sterling Oil Gold
Scale from -- to ++
We are "neutral" given the uncertainties regarding activity.
We are "neutral". We remain "neutral" but positive on Latin America. We remain "neutral". The accentuation of deflationary pressures and the fragility of the recovery will require the Bank of Japan to maintain its rates close to zero.
We are "positive". We remain "positive": the region remains supportive. "Neutrality": the dollar has become vulnerable. "Neutrality": the yen should stabilize against the euro. "Neutrality": Sterling remains vulnerable. We remain "neutral" after the downturn in the oil price. We remain "positive".
(1) Investment committee on 27/05/2010. (2) Investment committee on 24/06/2010.
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 commitment on behalf of Natixis Asset Management. Natixis Asset Management will not be held responsible for any decision taken or not taken on the basis of information contained in this document, nor in the use that a third-party may make of it. This document may only be copied for information purposes, and all copies are strictly for personal
use. It may not be used, reproduced, distributed or communicated to third parties in part or in whole without the prior written authorization of Natixis Asset Management. This material has been provided for information purposes only to investment service providers or other Professional Clients or Qualified Investors who has requested it. It is the responsibility of each investment service provider to ensure that the offering or sale of fund shares or third party investment services to its clients complies with the relevant national law. This material is provided in and from the DIFC financial district by Natixis Global Associates Middle East, a branch of Natixis Global Associates UK Limited, which is regulated by the DFSA. Address: PO Box. 118257, 5th Floor, Building 8, Gate Village, DIFC, Dubai, United Arab Emirates.
www.am.natixis.com
*weighting gap vs. strategic allocation of an investor
Written on 15/07/2010 The above referenced entity is a business development unit of Natixis Global Associates and a subsidiary of Natixis Global Asset Management, the holding company of a diverse line-up of specialised investment management and distribution entities worldwide. The investment management and distribution subsidiaries of Natixis Global Asset Management conduct any regulated activities only in and from the jurisdictions in which they are licensed or authorized. Their services and the products they manage are not available to all investors in all jurisdictions. Although Natixis Global Associates believes the information provided in this material to be reliable, it does not guarantee the accuracy, adequacy, or completeness of such information.