november 2009
anticipations Monthly Written by Philippe Waechter, Chief Economist of Natixis Asset Management
Our macroeconomic analysis The global economic outlook now appears much more positive. Several emerging countries, especially in Asia, believe that their economies are normalizing and reverting to a more typical cyclical trend. This was a key factor in the Bank of Australia’s decision to increase its benchmark interest rate. The industrialized countries, however, have not yet reached this advanced stage of the cycle. Despite clear signs of a recovery, activity levels remain low. This is one of the paradoxes of the current period: the recovery is taking shape, but very slowly. After grinding to a halt in the fall of 2008, the economies of the industrialized countries have yet to pick up much pace. This situation has direct consequences for labor market trends. Employment growth is likely to improve in the first half of 2010, though the picture across different countries will be mixed. But this does not mean that unemployment rates will start to fall rapidly: that will require a far higher level of economic activity. In the United States, growth has returned. After contracting for four consecutive quarters, the US economy grew by 3.5% q/q (annualized) in the third quarter of 2009. This growth was mainly driven by domestic demand. Consumption has received a major boost from the “cash for clunkers” program. However, the most positive contribution has come from the return to residential and manufacturing investment,
and going by historical “precedents” this trend seems to confirm that the economy is coming out of recession. Surveys of business leaders, moreover, suggest that the pick-up in activity will continue, though at a moderate pace. In Asia, activity continues to accelerate, powered by China’s economy. Normalization of the economic cycle is under way and output indicators have reached or even exceeded the highs of 2008 (especially in Korea). Activity levels are rising steadily and even Japan is benefiting from the more positive environment. The next step will be a change in economic reference points, such as monetary policy and exchange rates. In the Euro zone, activity is starting to pick up, as evidenced by a sharp rise in industrial output during the summer. This rebound was particularly marked in France and Germany. While the automotive sector has benefited significantly from “cash for clunker programs”, the key factor is improvement in other important sectors such as intermediate goods and capital goods. The Euro-zone recovery has nonetheless been held back by countries such as Spain, Greece and Ireland, and question marks remain over consumption, in view of the slow employment growth in all countries in the zone.
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anticipations Monthly november 2009
Our market analysis
The equity markets have been volatile over the past month, as they reacted to the publication of statistics confirming the recovery of global growth and the release of much better corporate earnings than expected. In a context of low inflation risk, tensions on the bond markets have remained limited. The equity markets, meanwhile, consolidated their gains over the month.
publication of much better than expected corporate results. However, all the gains were wiped out in the last week of October as investors opted to take profits, and the markets finished the month slightly lower. The continuation of the global economic recovery and the prospect of further improvement in corporate earnings should provide ongoing support to the equity markets.
n Money market The central bankers have confirmed that they expect to maintain accommodative monetary policies for an extended period. Since inflation risk is very low at present, the Fed, the ECB, and the Bank of England are likely to leave their rates unchanged until at least autumn 2010, to enable growth to gather pace. The Fed and the ECB have again referred to exit strategies in order to prepare the markets for the normalization of their monetary policy. When the time comes, they will mop up and/or reduce excess liquidity. Meanwhile, the Bank of England remained the only major central bank to continue its quantitative easing program, increasing its securities purchasing by GBP 25 billion, with the aim of stabilizing the financial markets and stimulating growth.
n Currency market The dollar continued to depreciate against most currencies to reach its lowest level since August 2008 (in effective exchange rate terms). Against the euro, it stood at around 1.50. In this context, the emerging countries experiencing a marked acceleration in activity have benefited from significant injections of capital, resulting in strong currency appreciation. This has led several Asian central banks to take action to stop their currencies reaching too high a level against the dollar. Brazil even went as far as reinstating the tax on foreign capital to stem the appreciation of its currency, which would have a very harmful effect on its exports.
n Bond markets There is very little tension on the government bond markets. This trend should continue as there is no near-term prospect of a rise in inflation and in light of the assurances given by central bankers that they will retain accommodative monetary policies for the foreseeable future.
n Commodities After a phase of consolidation during the summer, the price of North Sea Brent increased by almost USD 10 during the month, to close at USD 75.3 on 30 October. On the same date, WTI - the US oil benchmark - went above USD 80. Confirmation of the global recovery and upward revision of demand forecasts by the International Energy Agency were partly responsible for the uptick.
n Equity markets The equity markets have been volatile over the last month. They rose for the first three weeks of October owing to the improvement of the economic environment and the
Written on 16/11/2009
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anticipations Monthly november 2009 Our asset allocation bias We are “neutral” on the bond market and have a “positive” attitude towards equities. Risk categories
Risk subcategories
Tactical allocation*
Commentary
Oct. 09(1) Nov. 09(2)
Fixed income
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We remain “neutral”. Pressure on long yields should remain low given the moderate inflation outlook and the continuation of accommodative monetary policies for the foreseeable future.
Equities
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+
We remain “positive”. The equity markets should benefit from the rebound in growth and improvement in corporate earnings.
United States
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We remain “negative” based on the uncertainties linked to the strong rise in government bond issuance and the timing of the normalization of monetary policy by the Fed.
Euro
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We remain “neutral”. The ECB is likely to keep interest rates at low levels for several months as inflation expectations are contained and the recovery is expected to be slow.
UK
= =
= =
Fixed income
Emerging countries Japan
Euro issuers
Equities
Corporate
+
+
United States
+ + + =
+ + + =
= = = = =
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Euro UK Japan Dollar
currencies (against the euro)
Yen Pound Sterling
Commodities
Oil Gold
We remain “negative”. Strong uncertainties remain over the financing of public sector debt. We remain “neutral”. We remain “neutral”. Ongoing deflation and the risks weighing on growth should lead the Bank of Japan to keep interest rates at a very low level. We remain “positive”. The market should benefit from the improvement in corporate earnings and downward revisions of default rate forecasts for 2010. We continue to underweight the banking sector and restore our neutral stance on cyclical stocks. We remain “positive” in view of the US exit from recession and upgraded corporate earnings forecasts. We remain positive as the markets should be boosted by consolidation of the recovery, and we continue to overweight cyclical stocks. We remain “positive”. We remain “neutral” due to the fragile nature of Japan's recovery. Moreover, the high level of the yen is penalizing the country’s exports. “Neutral”: the euro/dollar exchange rate should remain steady. “Neutral”: we expect the yen to stabilize against the euro. “Neutral”: sterling should remain stable. We remain “neutral” following the sharp rise in the barrel price in October. We remain “neutral” but the short-term trend is upward.
Scale from -- to ++
*weighting gap vs. strategic allocation of an investor
(1) Investment committee on 24/09/2009. (2) Investment committee on 29/10/2009. 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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