March 2010
Anticipations Monthly
o Macro analysis
Philippe Waechter Chief Economist of Natixis Asset Management
The global economy is showing signs of an improvement. Worldwide industrial output is up yearon-year and the volume of global trade is also increasing. The global economy is no longer in its downward adjustment phase but is starting to show signs of a recovery. This more positive picture and its dynamic are being driven by the Asian countries.
Within the emerging markets, the Asian countries have returned to strong growth and trade has increased, largely driven by China. The level of activity reached at the end of 2009 has effectively 'rubbed out’ the period of recession. This improvement is spreading to other emerging regions such as Latin America, with Brazilian economic activity increasing rapidly in the past few months. It is taking place against a backdrop of continued high commodity prices, significantly benefiting the producer countries. Japan is a direct beneficiary of this more buoyant geographical environment. The boost given to its economy is linked to the growth in external trade. In the short term, internal factors have also been favorable due to the multiplication of measures to stimulate consumption. In the United States, the cyclical dynamic is more positive. The annualized growth rate for the 2009 fourth quarter was strong at +5.9% reflecting, amongst other things, a more robust situation for companies. Orders continue to increase and productive investment is picking up. This is key to embedding the upturn in the economic cycle.
This more positive situation has not yet, however, succeeded in reassuring households. Confidence surveys remain at a low level. This has direct consequences for the real estate market since households are struggling to take a longer-term view and are again becoming more cautious on this market. This is an important aspect of the economic cycle and the inflection witnessed since the end of 2009 could penalize the scale and sustainability of the recovery. The situation in Europe remains worrying. In the last quarter of 2009, annualized growth was just 0.46%. The main characteristic to emerge from these statistics was the 7th successive fall in internal demand. Consumption was broadly flat but investment continued to contract. This means that the substance of the economic recovery is very different from in the United States. The growth prospects are limited due to fairly clear divergences between growth models. Internal demand in Germany and France is proving insufficient to breathe new life into European activity. At the same time, Spain and Ireland, whose economies were driven by real estate during the preceding cycle, now find themselves in difficulty. The homogeneity which had been the case is now less marked and the impetus coming from France and Germany more limited. As a result, the ripple effects from one country to another (reflected in the density of trade within Europe) are less pronounced and the rebound is taking time to come through. In the short term, accelerating trade with the rest of the world will be a major source of improvement since, with the weaker euro, Europeans will benefit from the more buoyant global environment. Worries about economic activity have been increased by the turbulence in the euro zone linked to budget deficits. The drastic measures taken by Greece should weigh on growth in that country but will enable the euro zone to function more normally.
The employment market is starting to stabilize: the statistics for the beginning of the year reflect a slight downturn in this economic indicator but business leaders stand ready to increase recruitment if the robustness of the cycle is confirmed. Temporary employment is seeing rapid growth. Corporate and Investment Banking / Saving Solutions / Specialized Financial Services
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Anticipations Monthly / March 2010
o Our market analysis n Money markets
n Equity markets
The environment remains one of low inflation. The reduced strains on productive capacity and employment mean no upwards pressure on wages and prices. The inflation rate profile remains dependent on that of oil prices, in both the United States and Europe.
In the equity markets, the activity profile calls for a bull configuration as seen in the United States. Investors nonetheless react rapidly in the event a specific risk is perceived. This was the case in Europe with strains in the bond market linked to fears about Greece and Portugal. The adoption of the stabilization plan in Greece reassured the markets which returned to an upwards trend, underpinned by the improvement in corporate earnings.
Against this backdrop of fragile economic activity and the absence of any inflationary pressures, there will be no shifts in monetary policies for some time to come. In the short term, the central banks are deploying so-called ‘exit’ strategies, aimed at reducing or neutralizing the liquidity injected during the financial crisis. In the euro-zone, the ECB has already announced a gradual phasing out which should enable a return to more normal functioning for its interventions towards the year end. In the United States, the Fed's situation is more complicated due to the significant purchases of mortgage-backed securities. The corollary of these asset purchases was the substantial increase in the reserves which the banks hold with the central bank. The Fed’s aim is to neutralize these reserves.
n Bond markets The exit strategies of the central banks, the absence of any inflationary expectations and the appetite for sovereign debt are all being reflected in a relatively stable trend in yields. In the euro zone, the situation is volatile given the risk perceived on Greek and Portuguese bonds, with interest rates much higher than in Germany and France. Behind these strains are the deterioration in their public finances, the low credibility of their governments and long-standing, large public deficits. This is being reflected in investor concern and mistrust vis-à-vis these countries as to their ability to rebalance their public finances within a reasonable time horizon.
n Currency markets The questions raised by the Greek difficulties triggered a fall in the euro relative to the dollar. The European currency has devalued significantly against the green back and this trend should continue. Expectations of a shift in monetary policy are higher in the United States than in the euro zone. Another point to note: sterling weakness. Concerns about the UK economy explain this change in perception. Activity is struggling to accelerate and inflation is higher, putting the Bank of England in a difficult situation. The fall in the currency can be seen as a way to regain some margin for maneuver and increased momentum in economic activity.
n Commodities The oil price continues to trade at around USD 80 a barrel. Stocks are still high and, if necessary, production could be increased. Natixis Asset Management thus expects a fairly stable oil price relative to current levels.
It was only when the Greek government announced drastic measures (a sharp rise in taxes and reduction in spending) that yield spreads tightened. Spain and Ireland, about which questions are also being asked, have been spared due to the credibility of their fiscal policies. One thing is certain: the calming of all the strains and question marks surrounding the euro zone will take time.
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Anticipations Monthly / March 2010
o Our curent allocation preferences Risk categories
Risk subcategories
Tactical allocation*
Commentary
Feb 10(1) Mar. 10(2)
Fixed income
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=
We remain ‘neutral’ on the bond market. With monetary policy set to remain unchanged, the uncertainties weighing on activity suggest long-term interest rates will remain relatively stable.
Equities
+
+
We remain ‘positive’. Risk aversion has declined with the announcement of European government support for Greece.
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We remain ‘neutral’ in light of the Fed's commitment to keeping interest rates low for a prolonged period.
Emerging markets
= = = =
Japan
=
=
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.
Corporate inv. grade
+
+
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.
United States
+
+
We remain ‘positive’. The correction that took place at the beginning of the year represents an investment opportunity. We continue to overweight financial issuers.
+ +
+ =
We remain ‘positive’. The underlying economic trend and corporate earnings remain supportive.
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=
We remain ‘neutral’ due to the fragile nature of the Japanese recovery. Moreover, the high level of the yen is penalizing export stocks.
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+ = = =
We are moving to ‘positive’. The dollar should benefit from expectations on monetary policy.
United States Euro-zone Fixed income
Euro issuers
Equities
UK
Euro-zone UK Japan
currencies (against the euro)
Dollar Yen Sterling
Commodities
Oil Gold
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. We remain ‘neutral’. The fragility of the recovery calls for monetary policy to remain unchanged. We remain 'neutral' but positive in Latin America, neutral in Central Europe and negative in Asia.
We are moving to ‘neutral’.
'Neutral'. The yen should stabilize against the euro. We are moving to 'negative' due to the fragility of sterling. We remain “neutral”. The oil price should remain in the USD 75-80 range. We remain “neutral”. *weighting gap vs. strategic allocation of an investor
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By Philippe Waechter, March 22, 2010
(1) Investment committee on 03/02/2010. (2) Investment committee on 25/02/2010.
Chief Economist at Natixis Asset Management
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