Macroeconomic conditions driving a highly selective and diversified approach

05/07/2019

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Although the scenario of slump and recession can be dismissed at this stage, the macroeconomic environment remains exposed to the aggravation of tensions on trade between China and the US. To counterbalance the risks to growth, we will need more accommodating economic policies (especially monetary policies).

  • Although the scenario of slump and recession can be dismissed at this stage, the macroeconomic environment remains exposed to the aggravation of tensions on trade between China and the US. To counterbalance the risks to growth, we will need more accommodating economic policies (especially monetary policies).
  • In this context of geopolitical uncertainties, downward revisions of growth prospects and the maintenance of ultra-accommodating monetary policies, the Groupama AM team is particularly favouring “high-visibility” shares and carry assets, adopting a highly selective and diversified approach.        

In terms of fundamentals, the economic cycle remains buoyed by the consumer market, which is still robust and stable, contributing to the continued (albeit slowing) growth of global GDP.

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We are still not seeing the omens of recession. Household consumer spending is ahead of production and investment, where we have not yet observed any situation of excess, which is often the first sign of impending economic recession

Christophe Morel
Chief Economist at Groupama Asset Management

Sensitivity to the China-US trade dispute and vulnerability to financial trends – driving a downward revision of economic growth 

By contrast, the persistence of the trade dispute between the United States and China constitutes a major factor of uncertainty and instability for the macroeconomic environment.
“Today, the economic situation is still positive.  However, geopolitical and commercial uncertainties at international level could modify economic behaviour during the coming quarters. We also continue to perceive a weakening of certain indicators in economic analyses, but without reaching breaking point.

The erosion of confidence of the major economic players is the direct effect of anxiety concerning the dispute between China and the US, since the implications of this dispute are eminently structural and long-term. “The trade war between the United States and Chine must be analyzed far beyond the presidential mandate of Donald Trump, whose method of political action is characterized by the reversibility of past decisions and signed agreements. The trade dispute between the two countries is the expression of a more fundamental challenge, namely leadership of the world economy, which in particular involves the transfer of economic and technological intelligence,” explain Christophe Morel and Gaëlle Malléjac, Active Management Investment Director.

Under these conditions, the probability of a downward revision of growth prospects is reinforced. This is all the more likely, given that business activity is vulnerable to financial trends. “We particularly witnessed this at the beginning of the year, when American consumer spending responded negatively to the downturn in equity markets in December 2018,” says Christophe Morel, to illustrate the point. The correlation between financial trends and macroeconomic risks prompted central banks to make a veritable U-turn in their monetary policy, abandoning the idea of monetary tightening in favour of continuing to provide ultra-accommodating conditions on the money markets.
“Moreover, the central banks are attempting to offset the declining expectations of inflation, which they see as a major risk for demand and business activity,” he adds.

 

Investment strategy: stock selectivity is crucial

The resurgence of uncertainties as a result of slowing growth and of the measures taken by central banks constitute arguments for maintaining interest rates at exceptionally low levels. “Central banks will continue to ‘apply pressure’ to interest rates. We anticipate two reductions in Federal Reserve key rates, bringing Fed Funds down to 2% by the end of the year,” affirm Christophe Morel and Gaëlle Malléjac. For his part, Mario Draghi confirmed in June that the ECB would not hesitate to further relax its monetary policy if economic conditions make this necessary.

On the fixed-income markets, the Groupama AM team favours carry strategies in the segments of sovereign debt denominated in strong currencies and investment-grade high-yield corporate bonds.

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We identify various fixed-income issues having an attractive risk/reward ratio, in particular for "peripheral" European sovereign debt. We are also seeking to generate performance in the long-term compartments of loan debt, subordinate financial debt and corporate bonds

Gaëlle Malléjac
Head of Active Asset Management Investments

With regard to the stock markets, the valuation prospects will remain sensitive to two catalysts having opposite effects – the consequences of trade war on the one hand and the support given to risk assets by central banks on the other hand.  “Given these opposing forces in operation at a time when growth in corporate profits is only modest, the orientation of the markets is expected to remain without any clear trend.An environment of this nature, combining uncertainties, weak economic growth and the reactivity of central banks, should be particularly favourable to high-yield assets,” she adds.

So, the Groupama AM team is giving precedence to long-term instruments offering high visibility (in terms of their results and business model), identified in the universe of primarily “defensive” shares.
Another theme that is judged attractive concerns shares in companies oriented towards structural trends and able to profit from productivity gains, technological innovations or societal developments, in particular in the consumer market.

“In conclusion, we believe that it is necessary to remain prudent concerning re-correlation between the risks of the fixed-income markets and those of the equity markets, as well as with regard to the rarefaction of market liquidity.
More than ever before, these aspects constitute strong arguments for selectivity and diversification, irrespective of the asset classes,” affirms Gaëlle Malléjac.

 

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