October 2010
Anticipations Monthly
o Our macroeconomic analysis
Philippe Waechter Chief Economist at Natixis Asset Management
Since the start of 2010 the world economy has moved through two separate phases. A first phase of buoyant world activity, then a second, from late spring onwards, in which the world economy has been losing steam. Here are some explanations.
In the early months and until the spring, the global economy was driven by all measures taken after the recession in late 2008 early 2009. Numerous governments at the time had introduced economic-support measures in order to limit the risk of collapse. The synergy of the means used and the short time limits for implementing these measures imparted fresh economic drive. At the same time, the central banks adopted accommodating monetary strategies, resulting in a historic retreat in their money-market intervention rates. Alongside this stance, they assumed a major share of the pre-crisis market risks. They thus acted as last-resort purchaser for numerous financial assets. These strategies, similarly coordinated and complementary, helped bring about an economic upturn. The emerging countries also instituted economic support measures. The Chinese, Korean or Brazilian economic rescue plans played a significant role in turning the economy round in those emerging countries by re-stimulating trade. The foregoing factors all combined to make for a fairly rapid economic rebound. Fears of a deep and lasting recession, of the kind witnessed in the 1930s, were rapidly dispelled. The global improvement in economic activity reached its peak in the spring of 2010. The emerging countries, led by China and Brazil, saw their economic activity accelerate with a very high growth rate in the 1st quarter of 2010. The drive effect and the diffusion from the emerging countries to the industrialized countries have gradually worn down, without altogether disappearing. Over the same period, from the summer of 2010 onwards, the effects of the economic-recovery plans have been gradually diminishing.
The measures are losing impetus, with a lesser impact on economic expansion. At the same time, the conditions brought about by the easing of monetary policy have remained very permissive, although without generating any new downtrend. The exhaustion of these measures' effects resulted in a weakening of the trend in global economy activity starting in the spring. There is still growth, but no acceleration in the rate of economic expansion. In the United States, the delayed adjustment by the labor market, the severe disruption of the property market, the still very high indebtedness of households and their wish to save more will naturally lead to a lower rate of growth in economic activity during the winter, and its rate of increase will be slow to pick up in 2011. In Europe, the economic behavior pattern will be the same, though for differing reasons. Some countries, such as Germany, France or the Netherlands, will experience a resumption in activity, at times very robust (as in the case of Germany in the 2nd quarter of 2010) although the potential for these economies will be limited. Furthermore, those countries exhibiting the liveliest growth in the past will be in great difficulty since their model has become unworkable. The prospects for Spain, Greece and Ireland remain negative or very weakly positive for 2011. This will weigh the economy down throughout the euro zone. One major consequence of these changed circumstances is that each country's growth will result more from the resources it deploys than from the impact of the global economic trend. That is why new policy directions can be seen emerging in which each country seeks its own, more specific source of economic drive. Thus, during September, the Bank of Japan intervened on the market to limit the appreciation of its currency. By the same token, in the United States, the adoption of a still more accommodating monetary strategy is being voiced with increasing insistence. This would reportedly involve the Federal Reserve buying American government stocks in order to assure a sustainable impact on interest rates and change economic transactors' expectations. These policy shifts point to slacker inter-country discipline and reflect the need to seek further growth.
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Anticipations Monthly / October 2010
o Our market analysis n Monetary Policy
n Equity markets
Given this uncertainty regarding the trend in economic activity, and a context of low inflation, central banks will remain accommodating. They will keep their reference rates very low for some further time to come.
Since May, the equities market has been moving inside a tunnel. Attractive valuation levels are offset by continuingly strong macroeconomic uncertainty. The expectation of benefits from the Fed's new monetary policy worked distinctly in favor of the American market in September, reflecting the idea of improving prospects and reduced probability of deflation.
This need to maintain an eased monetary stance also reflects the fact that budget policies have no further room to generate additional drive. The budgetary consolidation phase begun in Europe, in particular, must be combined with a relaxed monetary policy in order to limit the restrictive impact on activity. The central banks will probably not confine themselves to maintaining low interest rates. They may introduce more aggressive strategies of purchasing public-sector debt with a counterpart issue of new money (the so-called Quantitative Easing strategy). The aim of these would be to change economic actors' expectations, particularly regarding inflation. Such measures could encourage them to change their time trade-offs and spend more now rather than postpone their expenditure. Such a strategy is already operating in Japan and could rapidly be implemented in the United States and even Great Britain. The ECB has no scope for intervening in this way. The public-debt purchases in the spring are exceptional and of limited extent, well below expectations in the United States.
n Foreign-exchange Market The expectations generated by this new monetary strategy have also had an impact on the foreign-exchange market. If such a policy translates into a deferral of the Federal Reserve's decision to wind its rates back upward, this will result in a weakening of the dollar. That is one of the reasons for greater uncertainty on the foreign-exchange market. If Great Britain were to adopt a strategy similar to that of the Fed, it could affect the value of the pound sterling.
n Commodities On this market also, the Fed's pinning of rates to very low levels has favored the taking of positions on the commodities market, thus driving prices upwards.
n Bond markets The monetary policy shifts and a less lively economic environment with no rapid upturn will continue to depress bond rates. This retreat in interest rates has accentuated since mid-September with the expected implementation of the Quantitative Easing strategy in the United States. This trend could be fuelled by the need for other central banks to buy American bonds to prevent excessive appreciation of their currencies against the dollar.
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Written on 19/10/2010
Anticipations Monthly / October 2010
o Our curent allocation preferences Risk categories
Risk subcategories
Tactical allocation*
Commentary
Sept. 10 (1)
Oct. 10 (2)
Fixed income
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We are remaining "neutral" on the reference bond markets. Monetary policies are set to remain accommodating for a long while yet, and will continue to keep interest rates down.
Equities
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We are moving over to "neutral". The upward-valuation effects are offset by strong macroeconomic uncertainty, even after a rally in September.
Euro-zone
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We are remaining "neutral". On the reference markets, this choice is explained by the ECB's monetary policy and the bearish effect of the American environment on interest rates.
UK
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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 remaining "neutral". The Fed will undoubtedly institute an even more accommodating monetary strategy before the end of the year.
We are "neutral" while awaiting a possible move by the BoE. We are remaining "neutral", but with a positive bias for Latin American and a negative one for Asia. We are remaining "neutral". The accentuating deflationary pressure and the precariousness of the upturn have made the Bank of Japan maintain its rates close to zero. We are remaining "positive". The valuation level of spreads is attractive.
We are "neutral". A very sharp upward movement in September was in response to high macroeconomic uncertainty. We are "neutral". Movements within a trading range and macroeconomic uncertainty. We are "neutral". We are remaining "neutral": no more uncertainty regarding Japan. The dollar has weakened. "Neutrality": the yen should stabilize against the euro. Fragility of the pound sterling. We are remaining "neutral", but with a bullish bias on commodities. We are remaining "positive".
Scale from -- to ++
*weighting gap vs. strategic allocation of an investor
(1) Investment committee on 09/09/2010. (2) Investment committee on 30/09/2010.
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Written on 19/10/2010
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