Coffee Break 14.11.2016

Last week was essentially marked by the unexpected election of Donald Trump as the 45th President of the United States. Donald Trump has advertised a significant infrastructure programme and a fiscal plan that could stimulate the economy, and likely widen the deficit, but we have less visibility on his other proposals, particularly on trade and immigration. Despite the reassuring equity market reaction in the US after Trump's speech, his election means more uncertainties, especially for emerging markets and other trade-sensitive assets. Bond markets have rapidly adjusted to the new situation as interest rates have risen sharply. Following Trump's election, we will monitor hints on the composition of its future White House staff and cabinet members.

Over the past weeks, we had already adapted our portfolios against the risk of Donald Trump's election, reducing our emerging markets exposure and portfolio duration. Following the election result on Wednesday, we cut our emerging markets overweight to neutral and further shortened our duration as we expect US interest rate to rise again.

In the next days, we will continue to monitor emerging markets' relative performance to developed markets and the US interest rate evolution.

Our current investment strategy on traditional funds:

Legend
grey : no change
blue : new change

EQUITIES VERSUS BONDS

We are now tactically neutral in equities versus bonds, maintaining a positive mid-term stance:

• The macro news flow is in line with low but positive growth.
  • In the US, we expect accommodative monetary policy to prevail while Chinese authorities will continue to offer a supportive policy mix.
  • Europe is showing resilience following the "Brexit" referendum.
  • The stabilisation in commodity prices mitigates downside risks on a global scale.
• The medium to long-term economic risks have increased due to the various political events:
  • Donald Trump's election has increased market uncertainties. Following the US election, we will monitor hints on the composition of the future White House staff and cabinet members.
  • The two-year "Brexit" negotiations should start by the end of Q1 2017 but the decisionby the High Court to require a "Brexit" vote in Parliament, before the government can start negotiations talks may add to the uncertainties.
• Central banks keep a dovish stance, providing ample liquidity to the markets.
  • The Fed is still on track for a December rate hike. Consensus expectations now believe there is a 80% chance the Fed will increase its interest rate on continuing decent growth and rising inflation figures.
  • The Bank of Japan innovated by yield curve targeting, while the ECB is expected to clarify its intentions.
• Oil markets continue their rebalancing. We expect a gradual increase in inflationary pressures and are confident in our inflation-linked exposure. However risks persist regarding the effective implementation of the OPEC's agreement on an oil production freeze (to be voted on, during the OPEC's next meeting on 30 November), as OPEC members have increased production in October.
• Emerging markets still experience improving fundamentals but Donal Trump election raised volatility in that region.

REGIONAL EQUITY STRATEGY

• We are slightly overweight in euro zone equities to benefit from a better momentum. We do not observe any material spill-over from the "Brexit" for the moment, but a catalyst to step up our exposure is still lacking.
  • We currently have a relative value strategy in favour of the DAX against the FTSE 250, while staying neutral. We anticipate a struggling domestic UK economy following "Brexit".
• We have maintained our underweight in UK equities. The government's perceived hard "Brexit" stance weighs on UK assets, pushing the GBP to new lows, bond yields significantly higher and leading to a substantial equity markets underperformance in common currency terms.
• We have a slight positive stance on the more defensive side of the US equity market.
• We have a neutral stance on Japan.
• Emerging markets remain our main conviction for the time being thanks to an improving economic and earnings momentum, the bottoming-out of oil and commodity markets, and attractive relative valuations. However, the region face uncertainties after Trump's election. Therefore, we have further reduced our emerging markets equity exposure to neutral.
  • We still prefer India thanks to improving economic fundamentals, both structurally and cyclically and an important domestic reform agenda, which makes the country less vulnerable to external influences.

BOND STRATEGY

• We now have stronger conviction on a longer-term rise in US bond yields and therefore decided to further reduce our duration on US Treasuries.
• We continue to diversify out of low/negative yielding government bonds:
  • We remain overall slightly short in duration.
  • We remain positive on emerging debt, but have slightly decreased our exposure as the carry trade looks less attractive in the post-election environment.
  • We are moderately positive on high yield. The significant spread tightening this summer has reduced the potential, but the carry remains attractive.
  • We remain positive on inflation-linked bonds, as base effects (oil prices) have a positive effect. US headline CPI should come in above 2% in December for the first time since mid-2014 and should peak at levels close to 3% during Q1 2017. Euro zone headline CPI should rise towards 1.5% early next year, a level not seen in the region since end-2013. External prices pressures are starting to increase and inflation expectations are starting to bottom-out from extremely low levels.
  • Our stop loss on our position NOK/CHF had been activated. As a result, we no longer hold a position in commodity-related currencies.

• In the US, initial jobless claims dropped to 254.000 in the week ending on 5 November, the Labor Department said. It was the 88th consecutive week below 300.000, the level associated with a healthy labour market and the longest stretch since 1970.
• Euro zone retail sales edged down in September (-0.2%), led by Germany.
• In Germany, monthly industrial production output dropped by a bigger-than-expected 1.8%. It was the biggest monthly drop since August 2014, coming short of expectations.

EUROPE

Positive performance for European equities with the Stoxx 600 closing at 337, up by 2.65% for the week.

• European stocks registered one of their best weeks since the summer, rising to a weekly high point on Thursday following the US election results.
• European equities rallied as investors perceived that a Trump administration would favour European banks with US exposure along with insurers, European military and defence companies as well as mining and basic materials firms tied to infrastructure building.
• Stocks fell slightly on Friday as investors digested the week's events and as uncertainties, volatility, and non-US election economic news worked their way through market sentiment.
• UK's FTSE 100 Index ended the week lower as the GBP strengthened against the USD and the EUR.
• At a sector level, Basic resources, Insurance and Banks outperformed the benchmark (11.33%, 8.93% and 7.53% respectively) while HPC (-1.47%), Food & Beverages (-2.27%) and Utilities (-4.22%) underperformed.

US

Positive week for US equities with the S&P 500 closing at 2164 last Friday.

• US stocks rallied last week as investors reassessed prospects for corporate earnings, economic growth, and inflation in the wake of the surprising victory of Donald Trump in the US presidential election.
• Gains varied widely depending on how sectors would fare under the new administration.
• Financials, industrials and health care performed well, while technology and utilities lost ground.
• And small-cap equities outperformed large-caps in a context of major gains across all sectors on high trading volumes.. Highest since the "Brexit" vote in June.
• At a sector level, Financials, Industrials and Health Care outperformed the S&P 500 (11.33%, 7.95% and 5.82% respectively) while Real Estate (-1.38%), Consumer Discretionary (-2.13%) and Utilities (-4.08%) underperformed.

EMERGING MARKETS

Negative week for Emerging markets stocks following the US elections results.

• Donald Trump's victory in the US presidential election triggered a frenzy of volatility in emerging markets.
• Mexico was hit especially hard, with the local currency falling heavily against the USD.
• Brazil also suffered despite the release of government data showing that the country's inflation rate reached a two-year low. But this could not offset investor fears about the negative effects of Trump's election.
• On the other hand, markets in Russia massively outperformed other emerging markets as investors anticipated improving commercial relations between the US and Russia.
• In China, exports sank to a worse-than-expected 7.3% in October, the seventh straight monthly drop. This recent decline adds to the global sentiment of weak global demand.
• At a sector level, Materials, Health Care and Energy outperformed the benchmark (0.27%, -0.83% and -2.52% respectively) while Consumer Discretionary (-5.24%), Utilities (-5.58%) and Consumer Staples (-5.98%) underperformed.

RATES

The US elections results brought more pressure on markets and increased volatility.

• The probability of a Fed hike in December fell following the markets turmoil.
• In this context, US yield curve steepened sharply, with the 10Y yield rising above 2% on Wednesday.
• The main reason was a strong performance of US breakeven, as the market started to price inflationary pressure due to the fiscal stimulus and protectionism measures of Trump's proposals, meaning higher yields and a steeper curve.
• In the euro zone, rates were also quite volatile with sovereign bonds selling off in core and periphery space.
• Over the week sovereign rates moved higher. 10Y US, UK, Japan and German yields stood at respectively 2.06%, 1.32%, -0.05% and 0.27%.

CREDIT

Trump victory brought some volatility on credit market, with a strong reaction Wednesday morning.

• Global European credit index widened by 3bps on Wednesday and lower Tier 2 widened by 5/10 bps in the morning to finally end the day around 5bps.
• In this context, we observed the same trend on Main and X-over, with less turbulence after a large widening Wednesday morning. BBVA which is exposed to Mexico suffered the most, whereas French financials benefited from good earnings.
• On the corporate side, Heidelberg Cement was upgraded to Investment Grade last week and observed a 50bps tightening. 

FOREX

As expected with a Trump victory, emerging and commodity-related currencies suffered the most last week.

• The JPY, CHF and EUR sharply rose after Donald Trump victory was confirmed in a risk adverse environment. Commodity-related currencies such as the AUD, CAD, NZD fell sharply
• But after Donald Trump preached unity in its victory speech, most currencies from developed countries quickly dropped, reversing early gains.
• Over the week, the JPY, EUR and CHF respectively lost around 3%, 2.2%, and 1.95% vs USD.
• By contrast the MXN slumped as expected after Donald Trump's victory and lost around 6% over the week.

COMMODITIES

Over the past week, commodities were slightly negative, as the GSCI Light Energy lost 0.4%. The index remains slightly positive for the year (+0.5%).

• The WTI was flat last week while the Brent fell by over 4.6% after the Energy Information Administration's inventory data showed 14.4 million barrels were added to stockpiles, marking the largest increase in nearly three decades.
• Natural gas prices tumbled close to 7% last week, as future traders mull over key indicators like warmer-than-expected weather in November in the US and higher stored inventories.
• Copper prices gained over 10%, as investors put their trust In Donald Trump to spend on US infrastructure.

WEEKLY MARKET OVERVIEW

UPCOMING FACTS AND FIGURES