Coffee Break 1/16/2017

Last week, investors’ attention shifted to Donald Trump’s first press conference as US President-elect. Although he did not provided further clarity on the economic policy measures he promoted during his campaign, the healthcare sector was penalised, as Donald Trump suggested a form of drug price control. In an immediate reaction, biotech stocks plunged with the Nasdaq Biotechnology Index ending the day of the press conference almost 3% lower.

Separately, we see that global growth is now expanding in a synchronised way: Germany, for instance, reported its fastest GDP growth rate in five years and in the US, the manufacturing sector’s expansion pace is closing the gap with services while consumer sentiment hovered near a 12-year high in January. Although starting to look toppish, economic surprises have further improved. In addition with a retreating economic policy uncertainty in Europe, this justifies our positive stance on equities.

This week, we will closely monitor the ECB meeting and the Inauguration Day in the US.

Our current investment strategy on traditional funds:

Legend
grey : no change
blue : change

EQUITIES VERSUS BONDS

We are overweight in equities versus bonds:

• The macro news flow is still well-oriented as shown by various sentiment surveys (consumers, manufacturing producers, homebuilders) and supported by a strongly positive market sentiment both in US and Europe. We expect a stronger US growth and believe in a potential US reflation.
• Central banks are decoupling but they mostly keep a dovish stance:
  • The ECB will keep a steady hand given political uncertainties as it decided to extend its quantitative easing at least until December 2017.
  • The Fed tightening cycle is at odds with accommodative policies in Japan, the euro zone and the UK. Markets are pricing two Fed hikes in 2017 and another two in 2018.
• Equities have an attractive relative valuation compared to credit, and their expected return should be boosted by the end of earnings recession in the US. The upcoming Q4 earnings season will give important information.
• Oil markets continue their rebalancing. However, greater producer response in the US and the strength of the USD could likely weigh on oil prices later on this year.
• Important political risks nevertheless remain: upcoming elections in Europe (The Netherlands, France and Germany) and “Brexit” negotiations. The unpredictability of the new US president could lead to up or downside risks, as demonstrated by the recent impact of Donald Trump’s remarks on the healthcare sector. The US policy mix could lead to misallocation of resources or an interest rate shock.

REGIONAL EQUITY STRATEGY

• We have maintained our slight overweight on euro zone equities, as we expect a gradual improvement from the high discount due to political uncertainties. Recent surveys point to some acceleration in activity. Furthermore, the recent depreciation of the euro is in favour of exports and overall GDP growth, while pushing inflation somewhat higher.
  • We still have a relative value strategy in favour of the DAX against the FTSE 250.
• We have maintained our underweight in UK equities. A deterioration in domestic UK macro indicators should hit the FTSE250 with significant domestic exposure. We avoid domestically-oriented small and mid-caps and still have a relative value strategy long FTSE 100 against a short FTSE 250.
• We are slightly overweight on US equities. Markets are anticipating a stronger growth and a higher inflation. This has pushed rates and USD higher and led to a tightening in financial conditions.
• We are positive on Japan. The country benefits from an aggressive domestic policy mix, stronger US growth and a weaker currency.
• We have maintained a neutral positioning in emerging markets.

BOND STRATEGY

• We have maintained a significant underweight in duration.
• We continue to diversify out of low/negative yielding government bonds:
  • We have maintained an overall below-benchmark duration as we expect stronger inflation figures and US fiscal policy easing to push bond yields higher.
  • We have maintained our relative value trade, long Italian yields / short Spanish yields, as Italian rates continue to tighten as too much pessimism was priced in.
  • We remain positive on inflation-linked bonds. Inflation expectations have reached new highs since 2014 and should keep growing, supported by oil price increases, wage growth, possible fiscal easing and protectionism measures.
  • We have a slight overweight in emerging market debt, both in local and in hard currency terms.
  • We are slightly positive on high yield, even as the significant spread tightening has reduced the potential, the carry remains attractive.

• In the US, the Michigan Consumer Sentiment preliminary index fell slightly in January to 98.1, from a reading of 98.2 in December.
• The US government reported last Friday that retail sales rose by 0.6% in December, with gains concentrated in automobiles, furniture, and online sales.
• The euro zone industrial production rose by 1.5% in November, up from 0.1% in October according to the European Commission.
• A preliminary estimate from the Federal Statistics Office in Germany stated that the GDP expanded by 1.9% in 2016, its fastest pace in five years. 

EUROPE

Slightly positive week for European equities with the Stoxx 600 closing at 366, up by 0.1%.

• Due to Donald Trump's comments during his press conference, global health care stocks lost heavily mid week, leaving the sector the worst performing one in Europe.
• Automobiles shares lost some ground during the week, following US allegations that FiatChrysler cheated on diesel emissions data.
• Financials ended the week higher due to positive earnings reports from some banks.
• Uk's main index, the FTSE 100, reached an all-time high during the week, buoyed in part by positive economic data and by mining stocks continuing their stellar performance.

US

Slightly negative week for US equities with the S&P 500 closing at 2275 last Friday (-0.1%).

• US equities ended the week mixed as the first significant Q4 earnings reports were published.
• The technology-heavy Nasdaq Composite performed the best and reached record highs.
• Financials stocks, which have fared best since the Presidential elections on the promise of higher lending margins and deregulation, started off on a weak note but received a boost later in the week from some positive bank earnings.
• Anticipations for stronger earnings growth in coming months may have also supported sentiment.

EMERGING MARKETS

Positive week for Emerging markets stocks with the main index closing the week up by 1.7%.

• China's foreign exchange reserves fell for the sixth straight month in December to their lowest level in nearly six years, as the government dipped into its war chest to stabilise the CNY after it fell sharply in 2016.
• In Brazil, the central bank cut its interest rates by a larger-than-expected 75bp in a move to boost the country's economy.
• In Mexico, the local currency fell to record lows following Donald Trump's press conference and his announcement that he would changes the US trade policy.
• In India, industrial growth rose by 5.7% in November (the month demonetisation was announced), to the surprise of many investors. The had feared that growth would have faltered because of a cash crunch.

RATES

The focus last week was on Donald Trump's first press conference since July.

• During this press conference the president-elect provided little details about his potential expansionary policies and the lack of significant political and economic announcements disappointed the markets. The US 10Y remained unchanged afterwards.
• The publication of the ECB minutes confirmed the extension of the QE beyond the previous cut-off date of March 2017 and the reduction of the amount of public and corporate debt it would buy each month from EUR80bn to EUR 60bn.
• 10Y US, UK, Japan and German yields stood last week at respectively 2.41%, 1.45%, 0.05% and 0.34%

CREDIT

Spreads started to widen slightly last week.

• Cash Investment grade (+1) and High Yield (+4) were the focus in a very active primary market
• Unicredit warned about the risk of non-payment of its AT1 coupons in case it did not complete its capital increase and divestment plans on time.
• While VW was on track to settle its emissions scandal case, Fiat Chrysler and Renault both came under scrutiny for similar reasons.

FOREX

For the second consecutive week, the USD kept weakening due to more scepticism in the FOMC minutes over Donald Trump's fiscal policy boost.

• Hard-"Brexit" related concerns continued to persist and weighed on the GBP.
• Pacific currencies (AUD, NZD, JPY) were the best performers last week. 

COMMODITIES

Positive week for commodities with the GSCI Light Energy up by 1.3%.

• Oil headed for its first weekly decline (WTI & Brent down by 2.3%) in more than a month as traders waited for proof that OPEC and other producers would follow through on promises to cut production.
• On the other hand, Natural Gas gained 3.8%.
• Gold traded at its highest price in almost two months (near $1200 per ounce) as investors continued to assess whether market moves since the US election have gone too far. 

WEEKLY MARKET OVERVIEW

UPCOMING FACTS AND FIGURES