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anticipations Monthly
January 2010
Written by Philippe Waechter, Chief Economist of Natixis Asset Management
Our macroeconomic analysis Economic momentum has improved since the start of summer 2009. In the emerging markets, business activity has returned to strong and robust growth. The industrialized countries are also seeing a return to expansion, but at a slower pace. Nevertheless, the risk of further setbacks in the developed economies has gradually receded and concerns have been allayed thanks to massive and continued government-led stimulus measures. Interviews with business leaders now reveal a more positive outlook: many report that the business cycle recovery is gaining strength each month. Order books are filling up and companies are more inclined to replenish their inventories. However, this virtuous recovery cycle has not entirely eradicated all of the weaknesses noted over the last several months. First among these is the question of the level of unemployment. Although business activity is back on track, it is still very much below the level recorded in the first half of 2008: the crisis of late 2008 is still not fully behind us. As a result, the number of new jobs created by this rise in business activity is lower than that noted in the first half of 2008. This situation continues to weigh heavily on households. Their resources remain both limited and uncertain, and they are less readily inclined to incur debt than in the past. Consumer spending therefore remains sluggish. This environment will prompt authorities to maintain their accommodating monetary policies in 2010. No immediate trend reversal is expected in this area. • United States The introduction of a new stimulus plan, expected to be focused on job creation and promoting the growth of small and medium-sized businesses, will aim to build the confidence of all economic actors in the strength and sustainability of the recovery. Combined with the replenishment of inventories currently being observed, such a plan might limit the negative
impact anticipated during the second half of 2010 of the first economic stimulus package introduced by the Obama administration in 2009. The merging of these two phenomena might help the business cycle recovery achieve its full potential. • Euro zone Significant heterogeneity across European markets dims this region’s prospects of returning to rapid growth in the near term. Several countries are applying growth models that no longer work as effectively as they did before the crisis, including Spain, Ireland, Greece and Portugal. Moreover, interest rate volatility in these countries is a source of uncertainty that plagues the entire Old Continent. • Emerging markets Within the emerging markets, the situation is certain to prove more complex since the economic cycle is already in an advanced stage and is generating constraints, as explained by the Reserve Bank of Australia, which raised its key cash rate three times in the fall of 2009, so as to keep its monetary policy in line with the Asian economic cycle. It is not possible to rule out other movements in 2010 in economies such as Brazil, South Korea or Argentina. The specific nature of the current cycle would then become more immediately apparent since the emerging markets would adopt more offensive strategies, and more quickly than the industrialized countries. Associated with increased trade intensity and a strengthening of financial links among these emerging markets, this situation would result in an unprecedented face-off with the industrialized countries. As each side adjusts to the crisis at differing rates, the shift in the balance of power between emerging and developed markets is undergoing radical change. This is a reflection of an evolving world economy, being built on new foundations.
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anticipations Monthly January 2010
Our market analysis n Money market Central banks kept interest rates very low throughout 2009 so as to limit to the greatest extent possible the constraints weighing on all economic actors. This strategy will be maintained in 2010. Apart from this aspect, central banks are looking to put in place instruments and methods that will absorb the liquidities injected into the market over the last year or so, which had allowed authorities to mitigate and mutualize risk. In recognition of the fact that today’s situation is different, banks are not interested in maintaining this excess liquidity over the long term, as they are eager to avoid any additional imbalances in the near future. For example, the ECB has already intervened, by reducing liquidity injections in relation to long-term operations. The Fed has also begun to alter its approach on this point.
arose in relation to the euro zone, prompted by the defiance of Greece, and then Portugal, in the face of fiscal difficulties. Investors are uncertain as to how these governments will act to resolve their budget problems. In general, these concerns about the health of public sector finances will persist to a significant extent in 2010 and may prove to be a source of greater volatility in bond markets
n Equity markets Improving economic conditions and lessening uncertainty triggered an uptrend in markets at the end of 2009. Equity markets are no longer undervalued. Investors are closely monitoring the resilience of this growth and the ways in which it is improving company results. Further alleviating uncertainty will be the key factor in strengthening markets.
n Bond markets Interest rates rose very slightly in the bond markets at the end of 2009, but without calling into question Natixis Asset Management’s confidence in rate stability overall. Doubts
Our asset allocation strategy From a tactical viewpoint, we expect that the year might roughly be broken down into two phases. The recovery is solid but halting, due to a lack of consumer confidence, brought down by lingering widespread and high unemployment. Natixis Asset Management does not anticipate any tightening of monetary policy this year in the industrialized countries. But it is clear that at the current pace of growth, this will become an area of interest in 2011, due to be widely anticipated by market participants from the second half of 2010. In the first half of the year, markets are therefore expected to see lower rates of return but should also be less volatile, increasing in volatility as monetary uncertainties mount and as the market ponders the rationale behind these tightened policies (the thorny issue of normative adjustment as growth gets back on track versus changes motivated only by fears of inflation). Even if markets are correctly valued, or nearly so, none of them are trading above their long-term average. However, in the event of an anticipated rise in interest rates, these valuations would become a little excessive.
Please refer to the asset allocation strategy table for 2010 shown opposite.
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anticipations Monthly January 2010 Asset allocation strategy table Asset class
Fixed income
Equities
Alternative
Theme
H1
H2
Money market
=
+
ST government bonds
-
--
LT government bonds
=
-
Index-linked bonds
=
+
Credit
+
=
HY
++
++
Securitization
++
+
Convertibles
+
+
International bonds
-
-
Emerging market bonds
+
+
Europe
+
=
Cyclical
=
-
Defensive
=
+
Growth
=
=
Financial
+
+
Small Caps
=
-
United States
+
+
Japan
-
-
Pacific
++
+
Emerging markets
+
=
Oil
+
+
Gold
+
=
Alternative
+
+
Real estate
=
+
US dollar
=
+
--
-
--
--
Currencies Pound sterling Yen
Comments
Underweight and highly diversified fixed-income portfolio A gradual preference for short-term fixed-income investments (EONIA is already expected to converge towards key rates), emerging market bonds, credit and convertibles, plus a minor position in index-linked instruments. All of this against the backdrop of a gradual withdrawal from fixedrate bonds, especially the 2-year segment, if the full extent of the expected recovery comes to pass.
Overweight in equities ‌ ne specially in the United States, if the dollar bounces back in the second part of the year, driven by the return to a positive rate differential with the Fed, in the event that it would be tightened beforehand, n in Asia and in the emerging markets, due to their strong growth. ‌but an underweight equity position n in Europe where fundamentals will bounce back less quickly; n in Japan, still hampered by the strong yen. Using a defensive approach throughout, investing in companies responding to emerging market demand by exporting know-how or technology. Commodities Akin to Natixis Asset Management’s opinion of inflation-linked bonds, only the presence of commodities will truly protect against an inflationary spiral, although this eventuality is still merely a matter of conjecture. Gold is expected to lose a little of its strength over the year. Currencies changing course The US dollar is expected to return tentatively to a more solid footing during the year, the pound sterling is undervalued and the yen is overvalued. Written on January 20, 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
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