June 2010
Anticipations Monthly
o Our macroeconomic analysis The financial markets paint a picture contrasting with the prognostications of the cyclical indicators. Cyclical data are on the whole reassuring as to trends in economic activity. Philippe Waechter However, for the medium term, Chief Economist of Natixis adjustments (particularly budget Asset Management adjustments) and the changing equilibrium between emerging and industrialized countries are fuelling marked uncertainty. When uncertainty increases, investors tend to move away from risky products and seek refuge in the safest assets. This arbitrage has triggered a rapid plummeting in interest rates on government bonds in Germany and the United States. World industrial production and world trade are continuing to grow rapidly. This trend is driven by Asia and the emerging countries, particularly Brazil. The United States are returning to a healthier pattern, while Europe is struggling to regain growth of any real extent. In the United States, activity is robust and the cyclical indicators published during the month remain positive. Businesses are maintaining optimism regarding their situation and SMEs, despite their slowness in resuming activity, are following the same trend. This is reflected in particular by favorable signals on the labor market, giving households a clearer perception of the future. The consumer is taking a more long-term view, feeling less hampered by the situation of the moment. In Japan, economic activity has been improving month on month. Its improved activity is driven by exports, particularly to Asia.
In the Euro zone, the cyclical indicators are firm, reflecting the European economy's following of the general pattern. This is a positive element, since internal demand remains insufficient to generate sustained acceleration in activity. This cyclical pattern is vulnerable to the observed financial market tensions. These tensions reflect investor doubts as to whether governments can stabilize public finances in a context of moderate growth. Investors are also seeking reassurance regarding the shape taken by institutions in the future. In the emerging countries, economic momentum remains strong, and looks to last. Countries such as China or Brazil are seeing strong acceleration in their activity, and are seeking to control their growth rate – particularly via monetary policy – in order to avoid any macroeconomic disequilibria.
Price trends are also in contrast. In the industrialized countries, the rate of inflation is chiefly patterned on changes in the prices of raw materials, energy and foodstuffs, whereas the underlying rate of inflation is tending to slacken, reflecting a lack of tension in the industrial base. Against this background, monetary policies should adopt a stable stance, as is noticeable in the central banks' strategies. In the emerging countries, inflation is a more complex issue, since activity is robust. In India and Brazil, inflation rates are higher than expected, exceeding 10% in India as an example. In China, the inflation rate is pinned down to around 3%, but even so, is clearly perceptible as a source of anxiety for the central bank. In several emerging countries, this situation is resulting in a slight tightening of monetary policy. The authorities are seeking to dampen down these tensions in order to prolong the economic cycle.
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Anticipations Monthly / June 2010
o Our market analysis
n Bond markets
n Money markets Investors have had doubts about the ability of economies to cope with the large-scale adjustments they will be facing, particularly in Europe. The moderate growth prospects in the Old Continent are perceived as insufficient to allow rapid, trouble-free resolution of public-finance disequilibria. During the 20082009 financial crisis, the accumulation of public deficits caused a very rapid rise in public debt. Investors are hesitant about the strategies to conduct in order to reduce it. This doubt caused the blocking of certain bond markets in early May, forcing the European authorities to present a united front in avoiding a major dysfunction within the euro zone. A first plan specifically addressing Greece was signed on the 2nd of May, and a plan with a wider ambit was signed on the 9th. What are these plans designed to do? Enable countries in difficulty to obtain finance without direct recourse to the financial markets: the euro zone as a whole provides the financing by borrowing on those markets. The effect of such a scheme is renewed ECB interventionism. The ECB has revived its liquidity injection operations to reduce the risks in the banking system. Moreover, the purchasing of public debt in exchange for liquidity has imported risky assets into the ECB's balance sheet. These changes in the workings of European monetary policy should result in sustainably low interest rates and an EONIA rate remaining below the refinancing rate for a long time. This uncertainty is causing renewed tension on money markets, despite the central banks' intervention. This has edged EURIBOR rates a little higher.
IInvestors' hesitancy led to arbitraging in favor of assets perceived as less risky. German and American bonds benefited from this move. Interest rates fell quite fast. Interest-rate trends over Europe as a whole followed a fairly even pattern. Interest rates of those countries regarded as the most risky were impacted by a significant risk premium. This was the case for Greece, Spain, Portugal and Ireland. French rates followed the lead of German rates, at a slight premium, which widened in early June when the German government announced a plan to rebalance is public finances with more precise aims than the one presented by France.
n Equity markets The increased risk burdened the equities market as a whole. Even though improved business earnings had generated attractive valuations, their effect was counterbalanced by the increase in risks and the reappearance of furtheraggravated uncertainty regarding the medium term. This behavior was not solely European in scope, since fears of a rapid adjustment of European public finances could weaken world economic growth.
n Commodities These uncertainties about the economic environment depressed commodity prices. The indices fell back, particularly on the more cyclical commodities such as metals and energy. Gold, on the other hand, made rapid strides forward, duly reflecting the global uncertainty.
Written on 14/06/2010
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Anticipations Monthly / June 2010
o Our curent allocation preferences Risk categories
Risk subcategories
Tactical allocation*
Commentary
May 10 (1)
June 10 (2)
Fixed income
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=
We are remaining “neutral” on the reference bond markets. The expected monetarypolicy stability, the absence of any inflationary upturn, and risk aversion will limit the risk taken on these assets on which returns are already very low.
Equities
+ =
+ -
We remain “positive”. The trend in business earnings is healthy and we believe that, in spite of the perceived uncertainty, cyclical factors will generate an upturn in the markets.
We remain “neutral”. The ECB's active contribution of liquidity suggests that rates will hold their very low levels for a long while yet. The "core" rates (Germany) are benefiting from a "refuge" effect.
United States
Fixed income
Euro-zone
=
=
UK
= =
= =
Corporate inv. grade
+
+
We remain “positive”. The spreads valuation remains at an attractive level.
United States
+
+
We remain “positive”. The macroeconomic effect should have a sustainably positive impact. We remain “positive”. The factors working in favor of the equities market (improved earnings prospects, capitalization) are still present, and should be beneficial to them. We are maintaining our preference for cyclical stocks.
Emerging markets Japan Euro issuers
Equities
Euro-zone
+
+
UK
= = + = +
= = + = = = +
Japan
currencies (against the euro)
Commodities
We are “negative”, since interest rates have already fallen sharply.
Dollar Yen Sterling Oil Gold
Scale from -- to ++
We are “negative” on account of the highly uncertain situation in Great Britain. We are remaining “neutral”, but “positive” for Latin America. We remain “neutral”. The accentuation of deflationary pressures and the fragility of the recovery will compel the Bank of Japan to maintain its rates close to zero.
We remain “neutral”. We remain “neutral” on account of the dependence on recovery in foreign trade. We are “positive”: the dollar has the role of a refuge investment. We remain “neutral”: the yen should stabilize against the euro. “Neutrality”: the pound sterling remains vulnerable. We are moving to “neutral” after the downturn in the oil price. We remain “positive”.
(1) Investment committee on 29/04/2010. (2) Investment committee on 27/05/2010.
*weighting gap vs. strategic allocation of an investor
Written on 14/06/2010 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
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