14 December 2017

Strong macroeconomic fundamentals will continue to support high-risk assets in 2018

Month after month, the macroeconomic fundamentals are confirming their robustness; establishing favourable conditions for the continued appreciation of high-risk assets. However, investors must remain attentive to the valuation levels of certain segments and must demonstrate selectivity.

[Gaëlle Malléjac, Directrice des Investissements – Gestions Actives]
Global growth prospects have been revised upwards for 2017 and 2018. This general economic climate favours a progressive increase in real interest rates and expectations of inflation over the next few quarters.

More precisely, the growth levels anticipated for the coming year should remain greater than potential growth. For example, the team at Groupama AM is expecting growth rates of 2.1% and 1.9% respectively in the United States and the eurozone (compared to 3.4% globally). “The improvement in macroeconomic fundamentals will again constitute a strong support for high-risk assets in 2018. By contrast, relatively high valuations of the latter should put a slight brake on their rate of acceleration. We therefore remain positive regarding these asset classes, while also being slightly more prudent,” explains Gaëlle Malléjac, Active Management Investment Director at Groupama AM.

Bond yields are currently disconnected from the macroeconomic situation

The other major theme that is expected to impact the markets in 2018 is not new – since it concerns the gradual change in the policies of central banks. The ECB will be reducing its asset purchase programme to 30 billion euros per month from next January, until totally cutting out the programme in September 2018. For its part, the Fed will probably announce an increase in its key rates at its meeting on 13 December, followed by three further hikes next year, after which the Fed Funds should reach 2.25%.

With central banks manoeuvring towards a gradual tightening of monetary conditions, resulting in slightly lower cash flows on the bonds markets, we can expect an increase in the yields of both sovereign debts and corporate bonds. “This would be a normalization, especially since at present there is a form of disconnection between bond yields and the macroeconomic situation. Sovereign bond yields, in particular, have moved only slightly this year, despite the improvement in growth,” explains Gaëlle Malléjac. “Under these conditions, we expect interest rights to increase to a new range of between 2.5% and 3% for the American 10-year yield, versus 2% 2.5% this year, and to between 0.5% and 1% for the German 10-year yield, compared to 0% – 0.5% this year.

Equity markets: prospects for two-digit profit growth

On the credit market, the fundamentals of issuers remain globally healthy: in the eurozone, a continuous reduction in corporate leverage can be observed, with historically high volumes of cash on company balance sheets, and the default rates are low, given the financial conditions that have so far been very favourable to issuers. “The main question concerns the narrow valuations of corporate bonds, because the spread levels are currently equivalent to those of 2007. This is justifiable due to the positive fundamentals. We anticipate a slight widening of spreads in 2018, which is why we are moderating our positions in this segment compared to previous quarters.

On the equity side, current valuations in the United States and even in Europe do not allow fundamental disappointments. “Multiples have strongly increased across the Atlantic. By comparison, shares in the eurozone are trailing slightly. Otherwise, valuation of equities remains attractive compared to valuations of fixed-income products.” According to consensus forecasts, growth in corporate profits should be close to 12% in 2017 and 9% in 2018 in Europe, compared to 11% and 11% respectively in the United States. This very solid profits trend should be reflected to a lesser degree in stock prices. “For 2018, we estimate stock market growth of 6 to 7% (excluding dividends) on both sides of the Atlantic,” comments Gaëlle Malléjac.

Investment strategy: 4 promising stock market themes

The team is maintaining its preference for the more risky shares, adopting a highly selective stock-picking approach, while at the same time limiting its positions on fixed-income products. “We see four major themes on the stock markets: first, the cyclical securities that are able to benefit from investment efforts and productivity gainssuch as the companies specializing in new technologies , second, the theme of mergers and acquisitions, which are judged to have a stimulating effect both for the buyer companies and for the targets, and, third, the theme of carefully nuanced exposure to emerging markets via selected luxury or industrial groups.

Our fourth conviction relates to the companies most exposed to the general improvement of the economy: we find these companies mainly in the energy, banking and commodities sectors,” is the succinct overview of Gaëlle Malléjac.

Finally, in bonds markets, we maintain our preference for short-term maturities and the high-yield euro segment, which are less sensitive to interest rate risk. At the same time, inflation-indexed bonds and financial subordinated debt remain attractive.

We are globally reducing our weighting in bonds and reinforcing selectivity in stock-picking, since we anticipate a return to specific risks.” Bond allocations will therefore be more tactical than over the course of the last few months. The potential return of volatility spikes could favour entry points, with the aim of profiting opportunistically from movements in spreads. “This could be the case with certain peripheral debts”  concludes Gaëlle Malléjac.



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