Still some juice left, but not much

Tuesday 23 April 2019

Global Investment Views, Fixed income, Equity

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Contributing Authors

Pascal Blanqué
Group Chief Investment Officer,

Vincent Mortier
    Deputy Group CIO, 

Equity markets have remained buoyant in recent weeks: the S&P 500 is trending towards an all-time high, the European equity market (STOXX 600) is close to last year’s peak and the performances of emerging markets have also been very strong. Renewed hopes of a trade deal between China and the US drove the last leg of the upside, following the previous boost from the recent central banks’ dovish turns. Credit markets have also been significant beneficiaries of the positive sentiment, with spreads tightening massively in Europe and stable at tight levels in the US in recent weeks.

Market complacency seems to be the name of the game in an environment of strong financial markets amid weak real economic performance. To explain this, we should note that the global risk asset rally has essentially been driven by a single factor: inflation. The downward adjustment of inflation expectations has driven yield curves lower across the board and steered developed market and emerging market central bank policies towards dovish territory. Central banks have successfully recreated the ‘Goldilocks’ environment, which boosted risk asset returns in 2012-2017.

The question is, where will we go from here? Is the low interest rate force strong enough at this point of the cycle and at current market valuations to push the rally further? While there is little probability of seeing a reversal on this front – the low interest rate environment looks to be here to stay – we believe market sensitivity to the growth factor will increase in a late cycle phase, with a clear focus on recession risk and earnings sustainability. Consensus expectations are for double-digit earnings growth in 2020 for the S&P 500, which is an optimistic view, in our opinion. To us, the risk of disappointment looks to be significant. This means that investors should aim to enhance diversification, stay defensive and seek opportunities that could emerge in case of positive market evolution. 

In the short term, three factors point to an extension of the rally: easier financial conditions, the favorable relative valuations of equities vs. bonds (the differential between the earnings yield and the 10Y government bond yield is attractive compared with historical averages since 1987), and the fact there is still some potential for price/earnings ratio expansion. Further relaxation of trade concerns, based on signs of a US-China deal possibly approaching and macro figures catching up, with the increased fiscal spending possibly passing through real activity, should support movement in this positive direction. 

Therefore, we believe that while there is still some juice left, it's not that significant, especially as markets are already pricing in some perfection.

Looking beyond the short term, the picture is rather blurry. The probability of negative returns will increase, in particular stemming from the combination of two elements. The first is that market valuations are not particularly compelling. According to our forecasts, the Shiller cyclically adjusted price-to-earnings (CAPE)1ratio, a measure of market valuation, should drift to about 28 at the end of 2019, from the current level of 31.

This projection, even if lower than the level reached at the beginning of 2018 (33), is close to 1929 figures and historically expensive. The second element is that looking at history, a material downward earnings revision (i.e., one driven by an economic recession), combined with expensive valuations, is negative for equity markets. Hence, the earnings outlook is becoming the key factor in whether or not the market continues its positive uptrend.

In balancing the short-term upside potential with these downside medium-term risks, our overall approach has been (and should continue to be) to trim the total risk in portfolios, take profits on strength and reallocate on setbacks to areas where we still see value to exploit in relative terms. In this regard, emerging markets, European equity and some segments of the credit market are the natural candidates.

1 Cyclically adjusted price/to-earnings (CAPE) ratio, otherwise known as the Shiller PE after Robert Shiller, who popularised it, measures the price of a company's stock relative to average earnings over the past 10 years.

Fixed Income: Time to be flexible, amid higher uncertainty ahead

Contributing Authors

Eric Brard
Head of Fixed Income, Amundi

Yerlan Syzdykov
    Head of Emerging Markets, 

Ken Taubes
    Chief Investment Officer, US, 
Amundi Pioneer

The backdrop for fixed income is one of global economic slowdown (with some reacceleration in Europe and in EM) and subdued inflation pressures. Central banks (CBs) confirmed their dovish stance and the Fed has put on hold the normalization of its monetary policy, leading markets to almost discount a cut before year-end. The ECB confirmed its dovish stance, going further than previously anticipated by the market. Yet, should the economy deliver above expectations, uncertainty on CB actions will return. Hence, we don’t see a case for particularly aggressive positions on duration, while we continue to view the environment as favorable for carry, with modest scope for further tightening of credit spreads after the movements seen since the beginning of the year.

DM bonds

With a global perspective, we stick to three main convictions on government bonds: 1) There is no value in European core government bond yields at zero/negative level; 2) We have a more positive view on duration in peripheral bonds and we maintain a preference for the US to Germany; and 3) In Europe we expect the curve to flatten on the 5-30 years segment. In the US, we think that uncertainty about the Fed’s policy path may soon return as economic growth could prove more resilient than expected. The market could be overpricing a possible rate cut and as a result, we prefer a defensive stance on the US curve, especially in the 10-year space.


In Europe the search for yield remains a key theme; we think there is still room for some further spread tightening on the back of a supportive ECB. Here, we prefer short-term maturities and higher yielding bonds. We continue to see opportunities in financials (subordinated space). In the US, as spreads have almost fully retraced their fourth quarter widening, we are becoming more cautious. As an alternative to credit, we prefer non-agency securitised sectors. These assets are less exposed to global risks, they benefit from a positive backdrop in relation to US consumers (rising incomes and low indebtedness relative to income) and they generally offer attractive valuations relative to their risk.

EM Bonds

Given the sharp rally since the beginning of the year, most of the returns might be behind us and we may be adopting a more cautious stance from now on. Nonetheless, the continued dovish stance by the world’s major central banks and an expected further easing in trade tensions may still play in favor of EM debt markets, setting the tone for another bit of upside in the next months. We thus remain moderately positive on EM debt, with a tilt towards hard currency (especially in some high-yielding countries) over local currency, wherein we prefer to be very defensive at this stage, on recent sluggish risk-adjusted returns, and wait for stronger signs of global growth stabilization before re-engaging.


In the short term, we stay positive on the USD, as with high yielding currency within DM; in the medium term we are neutral on the British Pound and on Japanese Yen, even if the policy normalization could trigger some appreciation of the latter currency. On EM currencies, we suggest a cautious stance, but are watching growth dynamics as key triggers for a more constructive view moving ahead.

Equity: Bull market to be tested by the earnings season

Contributing Authors

Alexandre Drabowicz
Deputy Head of Equity, Amundi

Yerlan Syzdykov
    Head of Emerging Markets, 

Ken Taubes
    Chief Investment Officer, US, 
Amundi Pioneer

Overall assessment

While March 2019 marked the 10-year anniversary of the bull market for the S&P 500 after its bottom during the great financial crisis, April saw the market lift back to the 2018 highs, while measures of expected volatility both in the US and Europe are back to very low levels. Lower inflation expectations driving the dovish turn in central banks’ stance have been the key driver of the year–to-date moves. As we enter the earnings season, the market’s focus is now switching to assessing the outlook for corporate earnings for the second part of the year and for 2020, and as a result we expect some short-term consolidation. Factors that could further drive a prolongation of the bull phase are: the Fed’s ability to successfully manage the slowdown in the US, a weaker USD and some upturn in the Chinese and European economy in the second half of the year, which could help global growth stabilise. While waiting for the earnings season to confirm this outlook, less supportive valuations call for a cautious approach to quities and a preference for EM given the wider growth differential ahead with DM, the support of the Chinese stimulus and the improvements on the tariffs front.

DM Equities

In the US market, the market focus is on companies’ forward earnings guidance. A stronger outlook on top-line growth, along with stillmanageable wage inflation, would suggest that the trajectory of profit margins is likely to reverse quickly. Yet, as the economic outlook and Fed policy remain areas of uncertainty, we expect a possible rise in volatility and markets to become more selective. The upside could continue, but will likely not affect the overall market. In this phase we focus on avoiding the overvalued areas of consumer staples and utilities, while exploring tech growth opportunities. In Europe, valuations have reset after the rally and are now in line with historical averages. Yet positioning in Europe is very light, and could improve in case of further earnings delivery and/or the resolution of political risks. Our preference is for cyclicals vs. the defensive sector and for industrials within the cyclical space. We recommend a neutral to cautious approach in Japan, being aware that more attractive valuations come at the risk of a strengthening Yen in case of possible volatility bouts linked to negative surprises on the tariff front.

EM Equities

The macro and fundamental backdrop remains reasonably supportive for EM equities. In addition, the trade tensions relief and the more dovish central banks’ tone have helped to foster risk sentiment. EM equities valuations also look relatively attractive vs. DM equities. We remain broadly positive on China in the expectation of a proper trade deal with the US, which is not yet fully priced in, and Chinese stimulus measures that have yet to kick in completely. We are also moderately positive on Russia given attractive valuations. More uncertainty is instead rising on the European side, which is becoming the new front of the US trade confrontation.

Important Information

Unless otherwise stated, all information contained in this document is from Amundi Pioneer Asset Management (“Amundi Pioneer”) and is as of April 19, 2019.

The views expressed regarding market and economic trends are those of the authors and not necessarily Amundi Pioneer, and are subject to change at any time. These views should not be relied upon as investment advice, as securities recommendations, or as an indication of trading on behalf of any Amundi Pioneer product. There is no guarantee that market forecasts discussed will be realized or that these trends will continue. These views are subject to change at any time based on market and other conditions and there can be no assurances that countries, markets or sectors will perform as expected. Investments involve certain risks, including political and currency risks. Investment return and principal value may go down as well as up and could result in the loss of all capital invested.
This material does not constitute an offer to buy or a solicitation to sell any units of any investment fund or any service.

Date of First Use: April 23, 2019.