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Tuesday 26 February 2019

Global Investment Views, Fixed income, Equity

Download the Complete March Global Investment Views

Contributing Authors

Pascal Blanqué
Group Chief Investment Officer,
Amundi

Vincent Mortier
    Deputy Group CIO, 
Amundi

If an investor had woken up today after three months and looked at the markets, he/she could reasonably say that not much had changed. The year started on strong footing and risk assets experienced a massive rebound in the first weeks of 2019, erasing most of the losses experienced in one of the most awful Decembers in history. As a result some valuation gaps have been closed somewhat, though not exhausted. Markets switched rapidly from a “fear” to a “greed” mood. Catalysts of the renewed optimism have included the dovish shift in the Federal Reserve’s strategy, and increasing signs of progress in the trade negotiations between the US and China.

So, something has changed. A year ago, the narrative was about synchronised growth, inflation returning to the radar screen, and higher rates. In the second half of 2018, the scenario changed, however, featuring a synchronised slowdown and almost no signs of inflation risk. Going forward, we expect further divergences through the year: the US will continue to decelerate (from strong growth), EM could stabilise and rebound in H2, with differences among countries, and the Eurozone could follow, with stabilisation and rebound in H2, if significant risks don’t materialise. So, we are now in a sweet spot (slowdown but no recession, central banks on pause mode or accommodative stance, core bond yields stable at low levels) and as long as this continues (ie as long as growth does not falter too much or alternatively the Fed is back to focusing on inflation or growth concerns), this spot is market-friendly, though we are likely to see volatility as some areas of uncertainty (geopolitics) and vulnerability (high debt) persist.

The guiding principle for navigating this late phase of the cycle is the consistent search for sustainability from different perspectives. Focuses include the following: sustainability of growth –ie, countries/areas with solid domestic sectors. It is particularly important in EM countries to avoid situations of excessively unbalanced and vulnerable growth models, preferring areas that are experiencing a rise of internal demand (Asia in particular); sustainability of corporate earnings, focusing on companies with solid business models; and sustainability of debt, avoiding the most fragile situations, which could suffer the most in phases of scarce market liquidity.

We strongly believe that focusing on fundamentals will prevent investors from falling into the pessimism (and/or excess of optimism) trap that a noisy news flow could trigger (trade disputes still in the radar screen and CBs communications). Following this sort of focus will also help in identifying market areas that could offer value for long-term investors. In January, we saw opportunities to increase risk exposure, starting with EM and credit (now partially exploited). We are now closely monitoring European equities which could now be an investor focus again. It is true that economic momentum remains weak, but further fiscal impulses could help stimulate domestic demand and a re-acceleration in EM growth could also benefit Europe. Earnings revisions reflect the pessimism associated with a slowdown, but we now see signs of deceleration in negative revisions, a signal that we are likely moving past the pessimism. Valuations are not discounted as they were at the beginning of the year, but they are not expensive either, with areas of opportunities in some cyclical sectors (i.e in industrials). Investors should not yet be in a hurry, but there could be reasons for deploying capital in European equities during the year, and we don’t believe there is cause to be short now on this asset class.

Fixed Income: Carry is your friend

Contributing Authors

Eric Brard
Head of Fixed Income, Amundi

Yerlan Syzdykov
    Head of Emerging Markets, 
Amundi

Ken Taubes
    Chief Investment Officer, US, 
Amundi Pioneer

Overall assessment

The U-turn in central bank policies will likely prevent any material increase in long-term rates. Markets priced out previously expected Fed hikes and are now focusing on the changing stances of all main DM and EM central banks which are becoming more accommodative across the board. The new CB mood should support sentiment for risk assets (credit and EM), keeping the search for yield alive among investors, though the focus should now be on appealing carry opportunities, after the strong spread compression.

DM bonds

On US bonds, we have an overall neutral view on duration, given the Fed’s greater policy flexibility and the potential for an early end to the balance sheet taper. On a global perspective, we are more positive on the US, neutral on the UK, and less negative on the Eurozone, as we don’t expect to see further downside in yields from current levels. We confirm our negative bias on Japan. We also continue to be positive on inflation linked bonds, in particular in the US. In Euro fixed income markets, we are more constructive on peripheral countries with some opportunities in Italy and we continue to exploit curve opportunities (i.e. playing the 2-30 year differential in Germany).

Credit

Credit has been a big beneficiary of the rally and the valuation reset was very fast in January. Therefore, we have become more cautious in the short term, though we believe that credit remains a key yield engine for bond investors. In Euro credit, we keep our preference for subordinated debt financial. In US credit, after becoming more positive at the end of 2018 whencredit spreads widened, we are now maintaining our stance. We focus on investment ideas in bonds that may not have fully participated in the rally, and at the same time we are taking profits in the areas that now appear to be fully valued. We remain wary of bonds from issuers with higher leverage than is appropriate for their credit rating. We continue to believe that structured credit sectors – specifically non-agency MBS, CMBS and ABS – may offer relative value to investors backed by a strong US consumer, and by the superior credit protections they offer relative to their quality ratings.

EM bonds

The start of the year saw an improvement in sentiment regarding EM debt. We expect that a more dovish tone by the Fed (and by other CB), a benign inflation outlook in most EM countries, and a stabilisation of economic conditions will continue to favor the asset class in 2019. On EM hard currency debt, we expect returns in line with the carry, while EM bonds in local currency may offer higher return potential, with many EM currencies still undervalued, albeit at higher volatility. We think investors should improve the quality of their portfolios, as risks persist (slowdown and trade).

FX

On USD, we have a neutral view due to the more dovish Fed. We are turning more cautious on the Euro amid a weak economic momentum (prefer SEK & NOK) and neutral on the GBP given Brexit uncertainty. We are positive on JPY (safe heaven in case of turmoil) and we favour EM FX with room for further appreciation.

IG credit spreads graph, HY credit spreads graph

Equity: Take a breath

Contributing Authors

Alexandre Drabowicz
Deputy Head of Equity, Amundi

Yerlan Syzdykov
    Head of Emerging Markets, 
Amundi

Ken Taubes
    Chief Investment Officer, US, 
Amundi Pioneer

Overall assessment

The equity rebound has come on fast and we can reasonably now expect the markets to take a breath. Going forward, the focus will be on earnings growth. This has been revised down materially across the board, and the market is overall more vulnerable, being in a late cycle. However, in a central scenario of no recession, earnings growth should remain positive globally, with opportunities opening at regional/ sector and stock levels. Investors should be aware of potential vulnerabilities (slowdown, geopolitical risks), but at the same time exploit the opportunities that some price dislocation can open, as it happened in Q4. 

DM Equities 

In the US, there are really no meaningful warning signs or excesses in the market that usually precede a recession or bear market. In Q4 earnings season, companies have generally announced earnings that are stronger than low investor expectations, but the number of companies revising down expectations is the highest since 2016, and the deterioration in earnings revisions should be a focus. We still like the more cash-generative tech companies with solid competitive positions. We also like value and cyclicals with the lowest valuations. We are cautious on traditionally defensive sectors both in value (utilities) and growth (staples). European equities were neglected last year, but bounced back in 2019, but there is still likely an excessive pessimism regarding this asset class. In our view, there is not a strong case to remain too short: political uncertainty is high, but may well fall after a Brexit resolution and EU elections.

Earnings revisions reflect the pessimism of the slowdown, but we now see signs of deceleration in negative revisions, a sign that the worst may now be behind us. Valuations are not as discounted as they were at the start of the year, but they are still attractive. Within an overall balanced approach, we continue to favor cyclicals over defensives, with some pockets of cyclicals pricing in a recession, which is not our base case. For banks, a catalyst is needed (relief of the political uncertainty or new accommodative measures from the ECB) for the sector to be back in favor.

Valuations and fundamentals are attractive for Japanese equities, but with some risks (dollar strength and vulnerability to exports).

EM Equities

We remain constructive on EM equities although in the short term there could be a pause after the rebound.

Positives for the asset class include the widening expected growth differential, attractive valuations vs DM, improving capital expenditure discipline, no major macroeconomic imbalances, and decent earnings growth (with country/sector differences).

We like countries with resilient macroeconomic fundamentals and domestic growth drivers, strong reform agendas and attractive valuations. We also like countries with favorable monetary and fiscal room and low external vulnerabilities. Our most preferred markets are China, India and Indonesia in Asia; we favor Russia in CEEMEA (as sanctions have been partially discounted) and Argentina in Latam.

We are cautious on countries with expensive valuations and high political risk.

Equity markets performances (% over 1 year)

Important Information

Unless otherwise stated, all information contained in this document is from Amundi Pioneer Asset Management (“Amundi Pioneer”) and is as of February 26, 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: February 26, 2019.

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