February 2010
Natixis AM Workshop Mars 2010
2010: the start of a new cycle? Macroeconomics, asset allocation and key investment strategies: the scenarios adopted by Natixis Asset Management for 2010 were discussed by Philippe Waechter, Chief Economist, Franck Nicolas, Head of Global Asset Allocation & ALM and Dominique Sabassier, Deputy CEO and Chief Investment Officer at the Natixis Asset Management January Workshop held to discuss the 2010 forecast.
The Natixis Asset Management Workshop dedicated to the " 2010 forecast " gathered 300 participants on January, the 20th
n 2010 forecast In his introduction, Dominique Sabassier, Deputy CEO and Chief Investment Officer, explained that at this time, last year, it was difficult to sense and believe in the market recovery. This one is nevertheless real. “It is the result of massive state intervention and major liquidity injections by central banks, but also a refusal by governments to succumb to protectionism, the low rate policy and a deliberately optimistic outlook that emerged in March 2009…” Risk aversion accordingly fell progressively and the economic improvement confirmed as the months rolled by subsequently underpinned this trend.
That said, "concluding that the crisis is behind us would be wrong. Given its scale and the means that had to be put in motion, it will have lasting consequences." Three of these consequences are already pressing: the weight and renewed role of emerging countries; the victory of politics over economics and finance that will most likely result in pressure for an alternative division of profits and lastly, the change in consumer behavior that reflects not only unease towards elites, wariness regarding over-consumption but even a certain distaste for the world of finance. Three issues that will of course have to be taken into account in 2010 and beyond…
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Natixis AM Workshop / February 2010
n Macroeconomic forecast Greater autonomy of emerging countries‌ Anyone looking at the global economy is hit, as the new year unfolds, by the contrasting dynamics of industrialized countries and emerging countries. The former are progressively seeing renewed expansion but with economic activity at levels still well below those seen in the first half of 2008. For the second group the return to growth has been much quicker. For some, economic activity has already exceeded or is very close to the levels 109 seen in early 2008. This isFrance clearly true of China but also of South Korea and 107 USA even Brazil. Emerging countries Euro zone were affected by the sharp fall in international Germany trade but were not105as directly hit by the financial crisis as western countries. UK Japan 103 Helped by very aggressive policies, the decline in economic activity in these Italy emerging countries at the end of 2008 did not as a result have the same 101 lasting impact as in industrialized countries.
Philippe Waechter, Chief Economist
99
Moreover, and this is striking, trade increased between emerging97countries, accordingly giving them greater economic and financial autonomy. Source: Datastream - Calculations: Natixis AM 95
2004
2005
2006
Comparative GDP performance Base 100 in 2005
2007
2008
2009
Comparative GDP performance Base 100 in 2005 120
Brasil Korea Australia Taiwan France USA Euro zone Germany UK Japan Italy
109
France USA Euro zone Germany UK Japan Italy
107 105 103
115
110
101
105
99 100 97
Source: Datastream - Calculations: Natixis AM
95 2004
2005
2006
2007
2008
2009
Source: Datastream - Calculations: Natixis AM
95 2004
Economic activity and weaknesses
2005
2006
2007
2008
2009
US - Employment compared to the top of the previous cycle
120
Brasil
Korea In 115the United States, the scale of the recession had Australia a major andTaiwan lasting effect on the jobs market and the France unemployment USA rate rose more quickly than during any 110 Euro zone previous crisis. It will remain high and could rise even Germany UK further, penalizing the behavior of consumers still burdened 105 Japan by too muchItaly debt.
n
60-61
69-70
73-74
81-82
90-91
2001
2008
103
101
99
97 100
Uncertainties surrounding household spending, and the Source: Datastream - Calculations: Natixis AM 95 inevitable tightening of 2006 public expenditure, mean that a 2004 2005 2007 2008 2009 sharp and lasting acceleration in internal demand is not on the cards.
95
93
Scale in months Base 100 at top of previous cycle 1
3
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5
7
9
11
13
15
17
19
21
23
25
27
29
31
Source : Datastream - Calculs : Natixis Asset Management
Natixis AM Workshop / February 2010
This could curb investment outlay and counteract any upward surge that would even have made it possible to get the economy right back on the rails.
France - Change in permanent workforce (%) 1974
1958
1983-85
1980-83
1992
2003
2008-2009
3
Growth in 2010 and even in 2011 is thus likely to be moderate. The outlook is thus for monotone convergence of GDP with its potential.
2.5
Reference base: the quarter prior to the turnaround in employment
2 1.5 1 0.5
In Europe, the overall situation is pretty similar to that in the United States. Employment slumped and the tightening of public finances will weigh down the economy. On top of this is a European dynamic that lacks homogeneity. Certain development models do not work as they did pre-crisis. For example, economies that were driven by the real-estate sector have suffered lasting effects. This phenomenon will slow the return to strong and lasting growth for the euro zone as a whole.
0
n
-0.5 -1 -1.5 -2 1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
Source: Datastream - Calculations: Natixis Asset Management
ÂŤ Excess levels of public debt may result in lower growth but not systematically in higher inflation rates...Âť n Another critical point : the questions being raised as to the crisis exit policies. A study carried out by US economists Kenneth Rogoff and Carmen Reinhart provides new insight:
Ratio public debt to GDP 4.5
Developed countries - 1946 - 2009 - Median figures
4
5
3.5
It indicates that where public debt represents under 90% of GDP it does not have a systematic impact on economic performance (but that above this threshold the growth rate slumps markedly); - It secondly indicates that there is no systematic link between debt levels and inflation. Higher public debt does not systematically result in higher inflation rates. The implementation of policies designed to stabilize public finances and debt require a lasting cut in public expenditure in order to change the expectations of economic stakeholders.
3
4
2.5
3
2 1.5
2
1
1
0.5 0
6
< 30 %
30 - 60 %
60 - 90 %
> 90 %
0
Source: Rogoff and Reinhart: "Growth in a Time of Debt"
Growth (bars) and Inflation (line Maturity right) as a function of public debt levels
Challenges for monetary and budgetary policies The markets will react sharply to the policies put in place and to the manner in which they are announced. The goal of governments during this period of public finance rebalancing will be to ring-fence investor expectations so as to in particular limit interest rate volatility. Government credibility will be a stabilizing factor in this regard. Within the euro zone, certain countries such as Greece are in real difficulty. It suffers from major and excessive imbalances and the stabilization plan put forward lacks credibility. So what is the solution for the euro zone? A highly cooperative approach with a view to establishing new rules regarding functioning and safeguarding in order to meet the challenges must be encouraged.
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Natixis AM Workshop / February 2010 Regarding inflation, the risk of inflation taking off is limited. Central bank interest rates will remain low throughout 2010. Nevertheless, the monetary authorities will progressively have to put in place exit strategies to correct necessary excesses associated with the financial crisis. The balance of the global economy is undergoing profound change. The pressures seen in developed countries and the dynamism of emerging countries is giving rise to arbitrage opportunities that may ultimately be to the detriment of developed countries.
/////// Your questions n
What is the outlook for commodity prices?
It is necessary to distinguish between oil and industrial metals. Having regard to production capacity, inventories and the level reached, there would seem to be little room for oil prices to rise (around US$80 per barrel). On the other hand, pressure could be a lot stronger on industrial metals given the strong growth of emerging countries and their infrastructure requirements. n
Will the euro continue to be a hard currency?
The euro could suffer as a result of policy differences within the zone.
n Asset allocation The current environment is complex. The economy has moved into a consolidation phase but with under-potential growth rates and flat consumption. Deflationary attitudes are increasingly widespread notably through the limited provision of credit.
A fragile environment, but a market at fair value
Franck Nicolas, Head of Global Asset Allocation & ALM
A certain number of risks remain including the low level of job creation and furthermore concerns regarding the slowly improving corporate results. Energy product prices are moreover trending upwards. This is all combined with possible inflationary pressures in emerging countries and monetary policies that are likely to recede.
In light of this, Natixis Asset Management believes that markets are fairly valued whereas a couple of months back they were clearly undervalued. Equity under-valuation has thus been soaked up. The same is true of the credit market where default rates (and hence risk premiums) have started to come down. As spreads had already pretty much factored in this development a few months ago, there should not be much further movement in this area. The correlation seen across all asset classes that was very strong in 2009, in particular on risky assets, should fade in 2010. Similarly, performance scattering within equities should increase. Directional strategies have lost strength. Stock-picking should spring right back.
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Natixis AM Workshop / February 2010
A “two-speed” year
Natixis Asset Management 2010 strategic allocation portfolio: a “two-speed” year
Natixis Asset Management anticipates a “two-speed” year, similar in performance terms to 2004, which was a year of translation.
Asset class
n A first portion without monetary tightening and with a good performance anticipated in the equity markets.
The first half should be marked by a recovery, no matter how limited, in employment, consumption and investment if company order books continue to fill up and excess utilization capacity is reduced. Although corporate investment traditionally lagged in adjusting, this time companies got in front of the real slump in utilization capacity. They are now once again in a position to invest because inventory run-down is almost complete, opening the way for a possible leverage on results since cost tightening combined with rising sales could result in an attractive return profile. Expectations regarding 2010 corporate results have already been largely priced in but could still spring a few pleasant surprises come the first quarter in the US and perhaps even later.
n The second portion of the year will, on the other hand, be more challenging with possible monetary tightening and expectations of price rises that not all companies will be able to pass on.
Monetary tightening in the second half still seems premature but the prospect of this for 2011 could have some negative effects, feeding market volatility. As regards inflation, Natixis Asset Management does not expect any pressures in developed countries (beyond 2010 a rise in inflation would seem to us to be very possible). Only production prices are likely to increase on the back of rising commodity prices, with a negative impact on corporate margins. Thematic developments would thus be possible at this level.
Category
S1
S2
Money market = C-T government L-T government = Indexed = Credit + Bonds HY ++ Securitization ++ Convertibles + International bonds EUR AUD 160 Emerging market bonds + JPY GBP 140 Europe + 120 Cyclical = 100 Defensive = 80 Growth = 60 01/07 05/07 Financial 09/07 01/08 05/08 09/08 01/09 05/09 + 09/09 Equities Source: Natixis AM,= Bloomberg Small Caps US + Japan Pacific ++ Emerging markets + Oil + Gold + 10 y / 2 y slope Alternative 3.5 + Cap. Alternative utilization rate on inverse scale Real estate = 2.5 Dollar = 1.5 Currencies Sterling -0.5 Yen --
-0.5 -1.5
+ -+ = ++ + + + = + = + + + = + = + 68 + + 73 - 78 -83 88
-2.5 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07
Equities: play “defensives” to stay in the market
Source: Natixis AM, Bloomberg
14%
Cyclical Defensive
Risk premium
12% 10% 8% 6% 4% 2% 0% 12-06
06-07
12-07
06-08
12-08
06-09
12-09
As regards equities, we should see some repositioning Source: Natixis AM, Facset during the year. It will be necessary to progressively pull back from cyclical stocks (while remaining positive on “delayed” cyclical sectors such as basic materials and construction) and move back into defensives and stocks with higher dividends. Of interest also will be stocks that may be the subject of M&As or those likely to benefit from emerging market growth.
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Natixis AM Workshop / February 2010 Currencies: the allocation teams favor the US market, which should benefit from a stronger dollar, as well as emerging countries (Asia in particular). They are negative on Japan not ruling out coming back towards year-end to take advantage of the falling yen, which may once again become a carry trade currency.
The yen, outperforming the dollar across the cycle
EUR JPY
160 140 120 160 100 140
EUR JPY
AUD GBP AUD GBP
80 120
Commodities, in particular agricultural and industrial metals, remain attractive in light of their de-correlation and infrastructure requirements of emerging countries. On the other hand, gold is only for hedging purposes.
60 100 80 01/07 05/07 09/07 01/08 05/08 09/08 01/09 05/09 09/09 60
Source: Natixis AM, 09/09 Bloomberg 01/07 05/07 09/07 01/08 05/08 09/08 01/09 05/09 Source: Natixis AM, Bloomberg
In bonds, given the outlook for monetary tightening and the discontinuing of quantitative easing policies, the teams are lengthening the duration by selling the twoyear securities. They are simultaneously diversifying the portfolios by means of indexed bonds, high yield debt and convertible bonds.
Bonds: diversify duration, even shorten it
3.5
3.5
2.5
2.5
1.5
1.5
0.5 -0.5
10 y10/ y2 /y2slope y slope Cap.Cap. utilization scale utilizationrate rateon on inverse inverse scale
68
73
73
78
0.5 -0.5
78
83
83
-1.5
88
-1.5 -2.5 -2.5
68
79 81 83 85 87 89 91 93 95 97 99 01 03 05 07
88
Source: Bloomberg 79 81 83 85 87 89 91 93 95 97 99 01Natixis 03AM,05 07
14% 12%
Risk premium
14%10% Risk premium 12% 8%
/////// your questions n
Source:Cyclical Natixis AM, Bloomberg Defensive
Cyclical Defensive
10% 6%
Is a recovery in the securitization market likely?
8% 4% 6%
2%
0% It is almost the only asset class that has not benefited from fall in risk aversion. And yet defaults only 4%the 12-06 06-07 12-07 06-08 12-08 06-09 12-09 happened on specific securities and amongst the lowest rated. Source: Natixis AM, Facset
2%
The market is undervalued. But from that to seeing it climb0% in 2010, that is somewhere we would not go given the mistrust shown it by investors. 12-06 06-07 12-07 06-08 12-08 06-09 12-09 Source: Natixis AM, Facset
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Natixis AM Workshop / February 2010
n Key investment strategies in 2010 The investment strategy must change. For some ten years it was possible to make money by basically applying directional strategies and following trends. It was a question of getting on some of the major market trends. These are now entering a normalization phase following a decade of excess at all levels. In 2010, there will continue to be concerns regarding economic activity, public debt and even inflation, and it will be necessary to be more mobile and quicker given the uncertainties.
Dominique Sabassier, Deputy CEO and Chief Investment Officer
“We will have to make a “corrugated iron” equity market, with limited potential but also with less substantial risks”.
Fixed income In the fixed income component, Natixis Asset Management remains positive on credit in the first portion of the year, but confirms that tightening has run its course as spreads will not be going back to the levels seen in 2002 or 2007.
Equities In the equity market, two investment themes stand out in what Natixis Asset Management believes will be a stable inflationary environment: n First and foremost income stocks. Groups in the energy, telecom and utilities sectors now pay out 7%. This can represent
up to 50% of the expected performance. n Priority should also be given to the major exporters, the global winners, whether large caps or mid-caps. Their know-how, expertise and technology enable them to benefit from the growth in emerging countries.
These universes are less directional, less “monolithic” and allow managers to fully show off their talent using a stockpicking approach.
/////// your questions n
How would you convince an investor to swap a euro fund for an equity investment?
Investors are still very risk averse and are looking to protect their savings. Their current goal is not necessarily to “win” in the market: more than anything they do not want to “lose”. There is thus a tendency at present to favor euro funds or tangible assets (real-estate, gold). There will nevertheless be massive outflows from these assets should inflation take off again. In the meanwhile, and in the current market climate, it is a pity that private investors are cutting themselves off from the possibility of higher returns.
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Natixis AM Workshop / February 2010
Natixis Asset Management in brief nT he European investment expert of Natixis Global Asset Management. nA multi-specialist with €305 million in assets under management* nA n offering of investment solutions targeted at a broad client base (institutions, companies, distributors and bank networks).
nP rivileged access to the expertise of some twenty specialist fund managers operating internationally, notably in the US (Loomis Sayles & Co, Harris Associates, etc.) and in Asia (Absolute Asia Asset Management Ltd) via the multi-boutique model of Natixis Global Asset Management. * Source: Natixis Asset Management as of 31/12/2009.
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