February 2010
Anticipations Monthly
Philippe Waechter Chief Economist of Natixis Asset Management
o Macro analysis At the start of 2010, two very different situations can be observed within the global economy. First, emerging countries are making rapid progress, driven by Asia. A particular feature of this situation is the strengthening of the links between emerging countries. Their activity is continuing and growing, at least in the short term, without passing systematically through developed countries. The other situation concerns developed countries. The labor market and, in many cases, excessively indebted households, are dampening consumer spending. As a result, domestic demand is showing only slight growth, and the conditions are not in place for a sharp upturn in activity. Thus, although the growth profile is positive, progress is moderate. The differences between emerging and developed countries do not end there, as this year economic policies - which have led to the recovery - will remain highly accommodative in western countries so as to remove any obstacle to activity. The outlook of low inflation risk will make it all the easier to apply these policies. Interest rates will therefore remain very low. In the emerging countries, changes in the bias of economic policy will be made more quickly.
showing that the euro-zone grew by just 0.4% on an annualized basis. At the start of 2010, business leaders remained upbeat about the economy but their optimism had not increased. This reflects the huge variation in the economies of euro-zone countries. Tensions on the bond markets in the euro-zone reflect investor doubts over how Greece, Portugal, and even Spain, will be able to return to growth while avoiding excessive imbalances in their public finances. This environment is generating uncertainty for Europe’s economic agents and is likely to hamper the recovery. In Asia, meanwhile, activity indicators are solid. Unlike in other regions, industrial output is now at far higher levels than before the crisis. Moreover, the stronger links between emerging countries, as well as their dynamism, should contribute, in particular, to the recovery of activity in Latin America.
In the nearer term, the signs coming from the US economy are rather more positive than at the end of 2009 and the beginning of 2010. Growth picked up in the fourth quarter (+5.7 % annualized) and the activity indicators for January and February are robust. The US economy is correcting the excesses of the recession. In Europe the picture is more mixed. The figures for the fourth quarter of 2009 have been revised downward,
www.am.natixis.com
Anticipations Monthly / February 2010
o Our market analysis Despite a fairly positive trend in activity according to business leader surveys, the financial markets have been affected by investors’ fears over the ability of certain European governments to stabilize, and then reduce their debt. This wariness has triggered a sharp drop on the equity markets and put pressure on the bond markets of the countries concerned, including first and foremost, Greece.
n Money markets Against a backdrop of low inflation risk and prospects of a moderate recovery, the central banks of developed countries have renewed their commitment to keep interest rates low for “some time to come”. The objective of the central bankers is to avoid constraining the economy in this phase of the recovery. However, they have also announced that they are putting in place measures aimed at mopping up the excess liquidity injected at the height of the financial crisis. The ECB has already made a commitment in this area, putting a stop to certain types of transaction (12-month liquidity injection), and should continue in this vein in the coming months. The Fed has not yet set a date for commencing its liquidity neutralization program.
n Bond markets
n Equity markets Equity markets The equity markets have been dropping since the start of the year on fears relating to some euro-zone countries. The CAC 40 lost 8.6% between December 31, 2009 and February 12, 2010, the EuroStoxx 50 was down 9.8% and the Standard & Poor’s index fell 3.6%. Risk aversion outweighed the more positive signals coming from corporate earnings.
n Currency markets The start of the year saw the euro tumble against all other currencies in the face of investor concern over the ability of the euro-zone to manage its internal situation. Currency operators favored the dollar or yen at the expense of the euro. The euro fell to its lowest level against the dollar since May 2009, at 1.36 on February 12, versus 1.44 on December 31, 2009.
n Commodities Since mid-October, the price of a barrel of Brent moved within the USD 70-80 range, compared with a level of around USD 45 a year earlier. This significant year-on-year increase is pushing up inflation, albeit temporarily.
Low inflation risk and the assurances given by the Fed and the ECB that they will keep policy rates low have brought relative stability to the US, German and French government bond markets. This is in stark contrast with the strong pressures affecting the bond markets of certain euro-zone countries. Greece – and to a lesser extent, Portugal – have aroused investors' concerns over the parlous state of their public finances, doubts about the ability of their respective governments to adopt the necessary austerity measures and the EU’s reluctance to bail out countries in difficulty.
www.am.natixis.com
Anticipations Monthly / February 2010
o OUR CURRENT ALLOCATION PREFERENCES We are “neutral” on the bond and equity markets. Risk categories
Risk subcategories
Tactical allocation*
Commentary
Dec 09(1) Jan. 09(2)
Fixed income
=
=
We are “neutral” on the bond market. With monetary policy set to be unchanged for some time, the uncertainties weighing on activity suggest long-term interest rates will remain relatively stable.
Equities
+
+
We remain “positive”. Fundamentals are improving although the markets in Europe are suffering short-term volatility.
=
=
We remain “neutral” in light of the Fed's commitment to keep interest rates low for the foreseeable future
= = = =
We remain “neutral”. With the inflation outlook low and the recovery expected to be fragile and moderate, the ECB is committed to leaving its policy rates at a low level.
Japan
= = = =
Corporate inv. grade
+
+
We remain “positive”. The correction that took place at the start of the year represents an investment opportunity. We continue to overweight financial issuers.
United States
+
+
We remain “positive” in view of the improving outlook for corporate earnings and valuations on the US market, which remain moderate. We favor small caps.
Euro-zone
+
+
We remain “positive”. The factors favorable to the equity markets (improving earnings outlook, valuation levels) are still present and should benefit the markets. We have increased our preference for cyclical stocks.
+ =
+ =
= = =
= = =
= =
= =
United States Euro-zone Fixed income
UK Emerging markets
Euro issuers
Equities
UK Japan Dollar currencies (against the euro)
Yen Sterling
Commodities
Oil Gold
We remain “neutral”. The fragile recovery calls for monetary policy to remain unchanged. We remain “neutral” and are reducing our exposure to Latin America We remain “neutral”. The increase in deflationary pressures and the fragility of the recovery should lead the Bank of Japan to keep interest rates close to zero.
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. The euro/dollar exchange rate should remain steady. We expect the yen to stabilize against the euro. Sterling is expected to stabilize. We remain “neutral”. The oil price should remain in the USD 70-80 range. We remain “neutral”.
By Philippe Waechter, February 18, 2010
Scale from -- to ++
Chief Economist at Natixis Asset Management
(1) Investment committee on 16/12/2009. (2) Investment committee on 03/02/2010.
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 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.
www.am.natixis.com