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10/09/2018 Market Insights

US Midterm Elections: Potential Economic Agenda and Market Implications

In the upcoming US midterm elections on November 6, there are high expectations of divided Congress, with the Democratic Party taking control of the House of Representatives and the Republicans – or Grand Old Party (GOP) retaining control of the Senate. Other scenarios are possible: the GOP could maintain control of Congress or the Democrats could sweep both the House and the Senate.In this piece, we examine some of the reasons why we believe the most likely election outcome is a divided Congress. We then look at the economic agendas for both parties and potential issues around their implementation. Finally, we analyze possible investment implications on US equities and fixed income markets.Read here

03/09/2018 Fixed income, Investment Talks

Back to a More “Normal” Market

The “normal” relationship between strong growth, higher inflation expectations and higher interest rates finally seems to have been restored. This new phase signals a normalisation in fixed income conditions, where fundamentals will regain their key role.The transition has not been smooth: in less than six months, 10-year yields in the US have risen from 2% to 2.9% and the 10-year German bund yield has doubled since December. This environment calls for an active approach to fixed income: active in duration management (short with rising rates, but neutral/long when the economic cycle slows down), active in currency management (as CB policies are not fully synchronized), and active in security selection in credit (overall quite tight) to find the right balance between risk and reward. This also calls for enhancing sources of diversification both to hedge against inflation risk (inflation-linked bonds) and to capture stronger economic growth (convertibles). On the USD, momentum has been weak, but higher US real rates will start to attract capital reverting the recent trend.DM government bondsCore govies are adjusting for higher inflation and less dovish CB. Investors should keep a short duration position, in all the core markets (Eurozone, US, UK, Japan). In the US, 3% is a psychological threshold for the 10-year Treasury yield, which we believe will be tested in the short term, while 3.5% would be a level to watch to consider a move to neutrality on duration. Pressure on rates will remain high in 2018. The market will have to absorb a huge amount of net issuance, with higher deficits fueled by a fiscal expansion, which comes after a long expansion. In the Eurozone, sovereign spreads tightened year-to-date as the ratings of several countries have been upgraded and economic activity remains strong. We remain mildly constructive on peripheral bonds, on Italy in particular, but opportunities have diminished.DM corporate bondsCredit has been relatively resilient in this phase, amid strong fundamentals and, in the Eurozone, technical support by the ECB purchasing program and strong demand. Carry trades, we believe, will remain well supported, even if less so than in the past 12 months. In the EU, we prefer subordinated debt (financial and non-financial). The HY market still offers moderate value: strong growth is a supportive factor, but leverage is high, especially in the US, though less so in Europe. Based on our analysis, one-third of US HY companies remain in challenging situations and could become vulnerable in case of further risk aversion. The Euro HY secondary market is supported by limited net supply, as the loan market is currently more attractive for issuers. Persistently high levels of equity volatility represent the major threat to the market. To deal with this, we believe investors should focus on highly liquid/high-quality securities.EM BondsEM bonds held well during the market sell off, with the high beta credit suffering the most, especially in Latin America. Market valuations are still tight, but fundamentals remain strong. A catalyst for a strong reversal in flows could be a strong dollar or US 10-year treasury yield aggressively raising toward 3.5%. These conditions are not in our base scenario. We still believe that returns of EM debt in hard currency can be in a range of 4-5% this year and that EMD local currencies could post a high single digit return.Contributing AuthorsKen Taubes Chief Investment Officer, US, Amundi PioneerDiego Franzin Co-Head of Equities, AmundiMauro Ratto Head of Emerging Markets, Amundi Important InformationUnless otherwise stated, all information contained in this document is from Amundi Pioneer Asset Management (“Amundi Pioneer”) and is as of March 9, 2018.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: March 9, 2018.

03/09/2018 Equity, Investment Talks

A New Phase for the Market

The February sell off after the prolonged bull run is, in our view, more a correction from overbought levels than the start of a bear market led by a recession. As we are moving towards a late phase of the cycle, with tighter financial conditions ahead, we expect higher volatility. Fundamentals remain strong overall and earnings growth will be the key driver for future performance.EuropeThe European renaissance theme is still intact as confirmed by the positive earnings seasons and 2018 EPS forecasts which are on a strong note in Europe. The market turbulence has been of a technical nature with no rotation within the themes in the markets and no spillover. Some concerns may arise in the future if the recent strength of the euro continues. At current levels the headwind is still absorbed by the strength of the underlying economy. For us, the important issue is the reason behind the strengthening of currency that we see mainly in the improving economy and we believe that this will be an offsetting factor for many corporates. Of course, this can transform in some headwinds for corporate earnings but we believe is not time to become defensive yet. The European index (MSCI Europe), 50% made of cyclicals and financials, should be favored with rising (modestly) interest rates (banks) and lasting EPS recovery (software, luxury, food & bev., tobacco, pharma, energy). Diversified financials could be a hedge against a potential short term rebound of bond-like sectors (Utilities, Telco, RE).United StatesUS equity overbought conditions no longer exist after equity market sell off in early February. We continue to monitor wage inflation, raw materials increases, and other rising costs as an offset to the tax reform windfall. We note that overall market valuations are not a big issue, but the most expensive stocks in the US market are historically as expensive as they were in November 1999. In this “expensive” territory, we can find mega caps, with market caps of more than USD50bn, accounting for about USD3tn in market cap (the total S&P market cap is USD24tn). Many of these companies can be vulnerable to higher interest rates. The rest of growth stocks is reasonably priced versus the overall market. On the other hand, not all value stocks are attractive: consumer staples, utilities and telecoms can be hit by higher rates and inflation which devalue high dividends. Moreover, some value sectors are under pressure from secular changes (ie, media, consumer staples, telecoms), and they can become value traps. In our view, financials (mega cap banks), energy and selected consumer discretionary should be favored in the current phase of the cycle. In this new phase in which CB will progressively remove stimulus and financial conditions will become tighter, we think it will be extremely important to be more selective, both in stock picking and asset sector allocation.Emerging MarketsThe correction for MSCI EM has been in line with that for MSCI World during the market turmoil, but we think it is worth noting flow resilience: inflows decelerated early after the 2018 record, signaling still good appetite from investors for these markets, which retain attractive valuations vs DM. The reporting season is still in its early phase, but till now, is confirming its positive momentum: 4Q17 yoy growth (current reporting quarter vs the same quarter one year ago) is +15% in USD. In our view, this momentum is likely to continue, with some deceleration seen mainly in 2H18. The outlook remains quite supportive for the IT sector (in China, internet companies, but also South Korean tech names after the correction). Asia is our favorite area, followed by EMEA (focus on Russia and banks in Central Europe) and LatAm, though this region is more expensive and riskier, due to NAFTA renegotiations, and more influenced by political risk (elections in Mexico). A recovery in commodity prices could improve the picture for this area.Contributing AuthorsKen Taubes Chief Investment Officer, US, Amundi PioneerDiego Franzin Co-Head of Equities, AmundiMauro Ratto Head of Emerging Markets, Amundi Important InformationUnless otherwise stated, all information contained in this document is from Amundi Pioneer Asset Management (“Amundi Pioneer”) and is as of March 9, 2018.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: March 9, 2018.