Cross-asset strategy

The last Fed committee minutes and jobs report have increased the probability of a rate hike in December. By removing the reference to the global slowdown, being more optimistic on household spending and investment, and highlighting “its next meeting” through different declarations about the decision to raise its rate, the Fed now seems more comfortable about stopping its Zero Interest Rate Policy, in place since 2008. Through Fed funds, the financial markets are now pricing in a 70% probability of a hike in December.

Once the US central bank proceeds with this first rate hike, investors will pay attention to the communication on how the Federal Reserve intends to manage this cycle of increasing rates. Taking into account the current economic and financial environment, we still think that the rate increase will be done gradually and with cautiousness.

The current accommodative actions of the ECB and the BoJ may also accentuate the cautiousness with which the Fed proceeds. In fact, a strong dichotomy between Fed policy and that of other central banks seems unlikely. While the Public Bank of China already decreased its rates and ECB President Mario Draghi, at the meeting on October 22, announced the very high probability of further policy-easing by year-end, we consider that liquidity will globally continue to be abundant, mainly in the Eurozone and Japan, supporting risky assets.



 

REGIONAL EQUITY STRATEGY

Strong framework for Eurozone equities

Eurozone equities still strongly overweighted

Eurozone equities continue to be supported by several elements. As mentioned above, this area is displaying better economic momentum and proving itself more resilient than the US. Moreover, liquidity conditions continue to be more supportive in the single-currency area. Regarding earnings, while European earnings negatively surprised for the third quarter, investors still expect strong growth for the full year (above 10%, while US earnings growth is expected flat, according to Datastream) and valuations are not so expansive. Thus, compared to the long-term expected growth, valuations are more attractive in the Eurozone than in the US and, in a context where interest rates are at a very low level, relative valuations still look attractive. As a consequence, we have kept our strong overweight on EMU equities, while staying underweight on US and UK equities. We have also maintained our overweight on European small-cap equities.

 

Neutral on Emerging Markets with a tactical overweight on Chinese equities

Although the slowdown in manufacturing activity slowed last month, incoming economic data will be crucial to validating a bottoming-out of the emerging economies. In our opinion, taking into account the current uncertainties on the economy and the expected long-term earnings growth, valuations do not look so cheap and we prefer to stay neutral on this asset class.

Nevertheless, among the emerging countries, we took direct exposure to Chinese equities (MSCI China) in mid-October. We consider that the stress surrounding a Chinese economic "hard landing" is receding as investors seem to have now integrated a growth scenario below 7%. As also mentioned above, given the policy actions announced during the Central Committee Plenary session, the achievement of a 6.5% growth target over the next 5 years is, indeed, really credible. Finally we see that valuations of Chinese companies are attractive.

 

Still positive (but cautious) on Japan

After ECB, PBOC (Public Bank Of China) and Fed activism, the Bank of Japan decided to keep its monetary policy unchanged, surprising the markets somewhat. Nonetheless the liquidity support is still there, as the BoJ continues to inject 80tn JPY/y, and keeping the Yen at this current (cheap) level for long enough would help progress the structural reform of Japan and Japanese corporations.

We shall also remain cautious until the uncertainties on emerging countries have dissipated, as Japan is one of the most exposed economies to these countries.

 

FIXED INCOME STRATEGY

We have maintained our short duration and our preference for further diversification

The latest declarations from the main central banks have been reassuring to our fixed-income strategy. While the Fed seems ready to hike its rate for the first time in 7 years, we are still underweight in government bonds as there is less of a cushion for absorbing any increase. We also slightly decreased our duration.

Consequently, we continue to prefer diversification away from government bonds, accentuating this by our decision to take out exposure to US investment grade corporate bonds. Hedged in duration, the purpose is to catch the spread, which seems interesting.

We kept this exposure to the US dollar unhedged.

 
 

COMMODITIES STRATEGY

No clear signals to turn positive

Though the commodity index continues to be strongly impacted in 2015, the signals have not been strong enough for us to turn positive on the asset class.

Oil: Macro trends have been a headwind for commodities since the beginning of the year. Low nominal output growth and USD strength are factors explaining the decline in commodity prices, and, while global GDP growth has slowed down since 2005-07, consensus forecasts continue to be revised downwards. The positive comes from the decrease in US oil production, which could make the global oil market more balanced in the coming quarters, potentially leaving the global market imbalanced. However, even if oil prices managed to find a bottom, uncertainties remained, especially on the demand side.

Base metals continued to be penalised by the sluggish activity in the manufacturing sectors, mainly in the emerging markets. For base metals such as copper and nickel, the efforts made to adjust production downwards could support prices in the coming years if the economic slowdown in the emerging markets, and China particularly, softens.