may 2009
anticipations Monthly
Written by Philippe Waechter, Chief Economist of Natixis Asset Management
Our macroeconomic analysis Some more favorable signals are appearing in certain regions of the global economy. In Asia the situation looks more positive than it did at the start of the year, while in the United States some glimmers of hope are emerging (suggesting that the recession undermining the US economy since the beginning of 2008 may soon start to reverse), and in Europe business leaders are beginning to take a slightly more optimistic view of the economic environment. However, for the time being, these signals are not yet tangible in the industrialized countries and have not been confirmed by an acceleration of activity. The shock waves that marked the end of 2008 are still spreading and are still having a strong impact on labor markets. We have therefore entered a period when forecasts are looking more positive, although the negative effects of past turbulence are still making headline news. In the United States this double-sided reality is clearly visible. During the first quarter of the year, economic activity contracted sharply and unemployment continued to rise at a rapid pace. Nevertheless, advance guard signs of an improvement in activity are starting to appear. Business leader surveys show a clear improvement in orders since March and a reduction in inventories that will inevitably translate into an increase in production. Household sentiment also looks better, with less pessimism concerning business activity and employment for the coming months. The combination of these two factors reflects an improvement in visibility for economic agents (both
companies and households), which suggests that aversion to risk is diminishing. In China, some positive signals have also emerged. Having posted a sharp slowdown in the second half of 2008, China’s economy is showing signs of stabilization since the start of the year. Industrial production has recovered, investment has accelerated, and business leader surveys suggest that this movement will continue and could have a positive effect on the entire Asia region. This trend change (both in the United States and in China) will not necessarily be linear and reflects, above all, the unprecedented economy policy measures implemented by governments. In the euro zone, the available data suggests a further marked contraction of GDP in the first quarter of this year. Having reached a record low at the end of the first quarter, business leader surveys showed a considerable improvement in April, apparently based on a perception of a slightly more dynamic global environment. Although the low point was probably reached in the first quarter, economic activity will remain fragile in the second quarter as the internal dynamic is still very weak: household spending continues to fall, European economic policy lacks the punch it needs to create a sustained economic stimulus and specific local difficulties have not been addressed with sufficient determination by the European authorities.
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anticipations Monthly may 2009
Our market analysis More positive signs from the global economy have favored an attenuation of risk aversion among market operators. As a result, higher-risk asset markets (equities, corporate bonds) posted sharp rises in April and the yields on government bonds rose substantially.
n Money market With little or no risk of inflation, the central banks will keep interest rates low in order to stimulate economic activity. To enhance the efficacy of their monetary policies, the central banks of the US, the UK, and Japan are buying government bonds on a massive scale, which has the effect of bringing down long interest rates and thereby facilitating the recovery of their economies (particularly in the real estate sector). On April 3 the ECB cut its principal refinancing rate by 25 basis points to 1.25%, and by a further 25 bp in May to 1%. The relaxation of monetary policy will no doubt continue. The ECB has indicated that it will take simultaneous measures to add liquidity and depth to capital markets via the extension to 12 months of the maturity of longer-term refinancing operations and via the acquisition of covered bonds.
n Bond markets Signs of improvement in the US economy have already prompted a certain amount of asset switching, particularly towards riskier assets (equities and corporate bonds) and away from government bonds. This was more visible in the United States than in Europe and led to stronger pressure on bond yields. However, aside from this movement, the rise in yields should be limited by continued low inflation rates, by the relatively low level of economic activity (which also translates into higher savings rates) and by monetary policies that are likely to remain accommodative for quite some time in a context in which the central banks are seeking to depress long-term rates in order to stimulate growth.
n Equity markets Driven by a perceived improvement in the US banking sector, the determination of the US administration to repair the banking system and the publication of more positive economic indicators, the equity markets have posted substantial gains. These factors have, in effect, contributed to reducing investor risk aversion. The Standard & Poor’s index put on 9.4% in April while the DJ Eurostoxx 50 gained 14.7% and the French CAC 40 was up 12.6%.
n Currency market Currencies have remained relatively stable since our Investment Committee last met on March 26, 2009. The dollar’s value versus the euro and yen has changed little in the absence of any particularly strong directional signals. We note the relative stability of Asian and Latin American currencies (real and argentine peso) against the US dollar after a period in which these currencies posted marked depreciations. This reflects the improved outlook for emerging countries.
n Commodities Commodity prices posted a slight recovery in April, despite the still slack demand on global markets.
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Written on May 14, 2009
anticipations Monthly may 2009 Our asset allocation bias We are “negative” on equities because we expect a correction particularly on European markets, and we are switching to “neutral” on bonds. Risk categories
Risk subcategories
Tactical allocation*
Commentary
Apr. 09(1) May 09(2)
Fixed income
+
=
We have switched to "neutral" on the sovereign bond market. The levels reached by the different maturities and the central banks’ accommodative policies should keep yields close to their current levels.
Equities
=
-
We are switching to a "negative" stance. The sharp and rapid gains on stock markets suggest a bear market rally. We would expect to see a correction due, notably, to the weakness of euro zone activity.
United States
+
=
We have switched to "neutral". The maintenance of interest rates at close to zero and the Fed’s continued acquisition of government bonds should keep bond yields at low levels.
Euro
= = = =
We have switched to "neutral". The markets have already priced in ECB rate cuts as well as the adoption of other conventional measures.
Japan
+ + = =
Corporate
=
+
We are switching to "positive" on investment grade bonds because there are signs that the economic low point has already passed and because valuations are still very attractive.
United States
+ = = = = = +
+ = = = = = =
We remain "positive". In spite of an expected correction, the underlying medium-term outlook is favorable.
Fixed income
UK Emerging countries
Euro issuers
Equities
Euro UK Japan Dollar
currencies (against the euro)
Yen Pound Sterling
Commodities
Oil Gold
We have switched to "neutral" as the Bank of England has been forced to maintain its key rates at 0.5% and to continue its quantitative measures. We remain "neutral". We remain "neutral".
We are adopting a "negative" stance: corporate earnings and earnings forecasts look fragile in the short term. We are adopting a "negative" stance: we expect a correction on the equities markets after the April rebound. We remain "neutral". "Neutral": the euro/dollar exchange rate should remain stable. We expect the yen to stabilize against the euro. "Neutral": Stability expected. The continuation of lackluster global demand suggests a stabilization of oil prices. We are switching to a “neutral” stance as risk aversion is diminishing.
Scale from -- to ++
*weighting gap vs. strategic allocation of an investor
(1) Investment committee on 03/26/2009. (2) Investment committee on 04/30/2009. 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
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.
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