Balancing between the economic fundamentals, which continue to look good, and a resurgence in risks
The fundamental environment, at both macroeconomic and microeconomic levels, has confirmed its robustness during this first half-year. However, an increase in political and geopolitical risks has also been observable for several months. Although the Groupama Asset Management team is not significantly modifying its market scenario at this stage, it is taking steps to adjust its strategies to take this new balance into account.
The economic context remains favourable, especially in the United States, where a slight increase in growth can be observed.
This factor could lead us to further increase our forecast for American growth forecast for 2018. We anticipate a normalisation of inflation, in sync with the economic cycle.Gaëlle Malléjac
Active Management Investment Director at Groupama AM
For companies, the dynamic trends driving increased profits remain strongly sustained, while fundamentals remain robust.
Fundamental environment conducive to growth
This good fundamental environment will continue to provide powerful support for risk assets during the next few months and is propelling a normalisation of long-term interest rates, especially in the Eurozone, in view of their current level.
Another key theme of recent weeks has been the position of central banks: their announcements are in line with expectations, with the Fed’s key rates continuing to rise and the end of the ECB’s asset purchase policy at the end of December. The ECB, by providing visibility on the timing of its first hike in interest rates, has even managed to induce a lowering of market rates at the end of a meeting announcing the end of its highly accommodating monetary policy. “The visibility given by the central banks at their last meetings is generally expected to have a calming effect on the markets,” adds Gaëlle Malléjac.
Resurgence of risks
However, this optimism regarding fundamentals and the visibility provided by the central banks should not blind us to the increase in risks that we have been witnessing for several months now. “The threat of American protectionism is taking shape in the many declarations of the US president and is becoming a durable factor of uncertainly on the markets. In the Eurozone, political risk has returned, with the formation of a Eurosceptic coalition government in Italy and a weakened coalition in Germany, against the background of disagreement on immigration policy,” is the analysis of Gaëlle Malléjac.
Emerging market risk is also reappearing, fuelled by the specific risks concerning individual countries, especially Argentina, Brazil and Turkey, against a backdrop of continuing geopolitical risk at global level.
Minor adjustments to our main market scenario
On the fixed-income markets, Groupama AM is maintaining its target of approximately 3% for the American 10-year Treasury Note at the end of 2018. In the Eurozone, our 2018 scenario predicted a range of 0.5% to 1% for the rise of the German Bund. “We now expect a German rate at the lower end of the predicated range, in view of the heightened political risks in the Eurozone and the visibility provided by the ECB on the first increase in interest rates in 2019”.
“On the equity markets, our adjustments concern the United States, where we have slightly raised our forecast for the period from now until the end of this year, in view of the rise in expected profits In the Eurozone, we have revised our target downwards in consideration of the increased political risk. Overall, we expect increases of between 3% and 6% on these markets over the next 6 months,” she explains.
Reduced exposure to cyclical stocks
The declared preference for higher-risk assets is maintained, but the increase in uncertainties has nevertheless impelled the team to reduce the weighting of risks in its management strategies. This adjustment is reflected in a reduction of over-exposure to the equity markets in our asset allocation.
In the field of equity, compared to the themes highlighted at the beginning of the year (cyclical companies sensitive to investment, mergers and acquisitions, domestic companies with a multiplier effect on improvement of the economy and securities exposed to the emerging markets) Groupama AM has rebalanced its strategy and reduced its positioning on cyclical stocks.
“Given the increased political risks in the Eurozone, we have reduced our exposure to bank securities. Our positioning on oil-market securities has been reinforced, in the context of a tense geopolitical climate, which, if it worsens, will result in a further increase in oil prices,” explains Gaëlle Malléjac.
In the fixed-income sphere, the policy of under-exposure to German debt and neutrality on American debt, adopted a few weeks ago, has been maintained. “We are maintaining a prudent position on Italian debt, since the uncertainties surrounding the budgetary policy of the new Italian government and the review of the credit rating agencies at the end of the summer could accentuate the volatility of Italy’s risk premiums. Our position on inflation-indexed debts remains a significant pillar of our fixed-income strategy”.
Finally, in the field of credit, the level of risk premiums attained after several weeks of under-performance has increased the attraction of this asset class. However, the high uncertainty level and, especially, the very low liquidity on this market have prompted us to preserve a neutral position on corporate bond investments. “We prefer to shift the tactical cursor to this asset class via the use of derivative instruments, which are both more liquid and more reactive,” concludes Gaëlle Malléjac.
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