Coffee Break 1/29/2018

We continue to judge our portfolio stance against the changes in the 3V – visibility, valuation, volatility - thematic. Visibility has been reduced somewhat as the transatlantic war of words over currencies (ECB President Mario Draghi firing a warning shot to US Treasury Secretary Steven Mnuchin at the recent ECB press conference) has contributed to increase the EUR’s value further against the USD. Since the start of the year, the value of the USD dollar against a broad-based average of major world currencies has fallen by close to 3.5%.

As a result, euro zone equities are only outperforming US equities in EUR, not in USD.

Going forward, it is difficult to envision a further escalation but the key take-away is that the weaker dollar rhetoric of the US Administration will help their trade accounts and support growth in the short-term. In any case, the combination of a weaker USD, strengthening commodity prices and robust activity has led the Q4 earnings season to start on a strong footing. Hence, equity valuations remain in check.

This week will see the busiest earnings reporting period across all regions. In addition, US President Trump’s State of the Union address might shed some light on the evolving trade policy as this appears as a major policy unknown in 2018, which, will increase market volatility.

Our current investment strategy on traditional funds:

Legend
grey : no change
blue : change

EQUITIES VERSUS BONDS

We remain positive on equities via both the euro zone and Japan.

• Global economic momentum is accelerating further, however geopolitical risks remain.
  • We concentrate our portfolio’s regional positioning on the euro zone and Japan. Emerging markets are benefitting from supportive fundamentals and a weaker USD.
• Central banks are turning less accommodative:
  • The Federal Reserve started its balance sheet reduction in October, hiked in December and should hike three times in 2018.
  • The ECB has recalibrated its programme, buying less bonds as of this month. A rate hike should not occur before 2019.
• While fundamentals remain investors’ focus for the time being, the recent US government shutdown (while only lasting 3 days) and upcoming debt ceiling discussions might create some uncertainty.
• Equities have an attractive relative valuation compared to credit.

REGIONAL EQUITY STRATEGY 

• We remain positive on euro zone equities which are supported by a strong economic and earnings momentum and relatively attractive valuations. Some political hurdles are nevertheless present.
• We have kept a neutral tactical stance on emerging markets equities.
• We have become less negative on UK equities.
• We remain neutral on US equities. After some exchanges between the ECB chairman and the US Treasury Secretary over the level of the USD, the dollar weakened and the euro strengthened.
• We are positive on Japanese equities. Japanese earnings have been progressing so far without a depreciation of the JPY.

BOND STRATEGY 

• We are negative on bonds and have a low duration.
• With a tightening Fed and expected upcoming inflation pressures, we assume rates and bond yields should continue their uptrend.
• We continue to diversify out of low-yielding government bonds:
  • We have a neutral view on credit, as spreads have already tightened significantly and a potential increase in bond yields could hurt performance.
  • We have a diversification in inflation-linked bonds.
  • We keep our positive stance to emerging market debt, as the on-going monetary easing represents an important support.
  • We are neutral on high yield. The correction on US High Yield market observed recently is not expected to continue.

• In the US, the composite PMI fell to 53.8 from 54.1 the previous month, its weakest pace of expansion since last May.
• The US economy grew at an annualised pace of 3.2% for Q3 2017 as government spending was revised higher and the contribution from both personal consumption and net trade was lower than initially expected.
• In the euro zone, the consumer confidence index increased by 0.8 to 1.3 in January, its highest reading since August 2000.
• At 57.9, the euro zone composite PMI was above market expectations.   

European equities

Flattish week for European equities.

• Euro zone Banks performed well, supported by higher bond yields.
• Healthcare also outperformed thanks to Novartis’ solid results.
• Country wise, the IBEX outperformed led by its banking sector and the FTSE 100 was –again- the worst performer dragged down by the surge of the GBP.

US equities 

Fourth consecutive weekly gain for US equities.

• The spending bill passed by Congress to fund the federal government for another three weeks, boosted the markets at the start of the week and investors switched back their focus to the Q4 earnings season.
• Large-cap stocks outperformed mid- and smaller ones during the week.
• Health care, lifted by some biotechnology mergers, and Consumer discretionary led the gains while Energy, Utilities and Consumer staples lagged.

Emerging Markets equities

Another positive week for Emerging markers equities.

• Asian stocks surged at the start of the week following strong Chinese economic data.
• The technology sector in Asia fared well mainly due to the strong performance of the large internet names. The surging commodity futures and the weakening of the USD boosted cyclicals.
• In Brazil, the domestic equity market rallied after a local appeals court dismissed former President Lula’s appeal of his corruption conviction.

Rates

The ECB left its monetary policy unchanged last week.

• Sounding less dovish than expected, the ECB pointed towards robust economic figures in the euro zone and dismissed concerns on the level of the EUR as a consequence of solid European recovery.
• The IFO business climate index in Germany printed at 127.7, well above expectations and a new 10Y high.
• 10Y US, UK, Japan and German yields stood at respectively 2.61%, 1.41%, 0.078% and 0.63%.

Credit

Investment Grade credit spreads declined last week with no huge issuance.

• The inaugural AT1 issue by Belfius at 3.625% over 7Y was a strong success and was 8x oversubscribed.
• Sub debt continued to outperform Senior debt with insurance at -10bp, Hybrid nonfan at -5bp and Tier 2 at -4bp.
• In the US, 80% of the reporting companies beat expectations.

Forex

Underperformance of the USD last week.

• The USD underperformed all its majors peers on the back of convergence of monetary policies as some central banks started to upgrade their dovish stance (ECB, Norges Bank, Riksbank).
• The EUR/USD made a spike above 1.25 on Thursday after the ECB meeting.
• The GBP posted better than expected economic data (retail sales, GDP).
• The CHF had a good week as markets began to wash out short positions. 

WEEKLY MARKET OVERVIEW

UPCOMING FACTS AND FIGURES