Asset Allocation: Our preference for risk assets is maintained

28/09/2017

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The fundamental economic environment remains very favourable, so that, as predicted, central banks have been able to loosen their monetary policy. Our investment strategies remain essentially unchanged in this context, maintaining a selective approach with a preference for risk assets.

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[Gaëlle Mallejac, Directrice des Gestions Actives]

 

The summer was calm on the markets, and the fundamental environment remains well-positioned and positive.  At the macroeconomic level, the recovery has been gathering strength since spring, and the momentum of growth is now self-sustaining. Of the developed countries, the US is showing robust and balanced growth, while the eurozone in 2017 could see its best annual growth for 10 years. In the emerging countries, growth remains positive. On the microeconomic scale too, the fundamentals remain positive.

We therefore remain unworried concerning the fundamentals. New initiatives are now expected from the central banks. To confirm this forecast, given the current environment, a new phase of monetary policies is beginning on both sides of the Atlantic. The FED will start to reduce its balance sheet in October and is expected to pursue its monetary normalization by again increasing its rates in December. Meanwhile, the ECB is preparing to announce the reduction of its debt purchases at its next meeting. These changes in central bank policies should not come as a surprise for the markets. We are anticipating a very gradual reduction of purchases by the ECB.

An environment that is still favourable to risky asset classes

 We are anticipating equity markets to rise during the next few months, reinforced by firmly positive momentum. In terms of end-of-year targets, we are maintaining our targets unchanged for the eurozone, i.e. 5500 points for the CAC 40. We are revising our targets slightly upwards for the S&P 500, increasing to 2550 points, in view of the impact of the fall in the dollar and the low market expectations concerning the implementation of economic policy, which could provide a positive surprise if agreement can be reached, especially on tax reform.

In the credit segment, the trend of fundamentals is continuing to improve, while default rates are continuing to fall. Nevertheless, we are not anticipating any further tightening of risk premiums, since the announcement of a slowdown in bond purchases by the ECB constitutes a reduction in support for this asset class.

Expected rise in the trend of interest rates

The levels of sovereign rates attained during the summer, influenced by disappointing figures for inflation and the reconstitution of a risk premium, especially for geopolitical risk, are in our opinion excessively low and disconnected from economic fundamentals. We are maintaining our prediction of an upward trend in rates over the next few months, impelled by a more reassuring trend of inflation and, more particularly, the impending reduction in support by central banks. So, for the end of 2017, we have set our targets at 2.7% for the 10-year American Treasury Note and 0.70% for the 10-year German Bund.

Priority to pro-growth strategies and inflation

In terms of asset allocation, we are maintaining our preference for the high-risk asset classes, primarily equity.

On the equity markets, we are increasing our exposure to the securities that are sensitive to the improved economic situation and to inflation. We are also maintaining our exposure to cyclic companies dependent on investment. In sectoral terms, we are taking some profits on technological securities and reinforcing our position on pharmaceutical securities. We are maintaining our bias towards small and mid caps.

On the fixed income markets, we are maintaining our under-exposure to sovereign bonds on both sides of the Atlantic, especially for intermediary maturities on the yield curve, and maintaining our preference for inflation-index bonds and private debt.

On the credit markets, while maintaining our allocation, we prefer short maturities and financial debts (especially subordinated debts) and are initiating a progressive reduction of the beta (risk) of our portfolios, moving towards increased neutrality for this asset class.

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