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PORTFOLIO MANAGEMENT REPORT

PORTFOLIO MANAGEMENT REPORT MANAGEMENT SOLUTION INVESTING IN BANQUE DE LUXEMBOURG FUNDS YELLOW PROFILE - EUR THIRD QUARTER 2016


PORTFOLIO MANAGEMENT REPORT

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MACROECONOMIC ENVIRONMENT In the third quarter, the central banks kept the markets in suspense again. In the United States, the Federal Reserve decided to leave its monetary policy unchanged despite a more vigorous job market and the rebound in underlying inflation. On the other hand, economic activity was relatively modest. Having gained 0.8% quarter-on-quarter in the first quarter, between April and June growth came to 1.4%. Although consumption surged, benefiting particularly from the improved job market and weak oil prices, investment seems to have stagnated. The US central bank is unlikely to alter its monetary policy in November - its meeting is scheduled for the week before the presidential elections - but a hike in rates in December is still a plausible scenario. In the eurozone, economic activity is also continuing to grow at a modest pace on the back of lower oil prices, the weak euro and cash injections from the European Central Bank. But despite this liquidity boost, eurozone inflation is proving slow to pick up. This is likely to encourage the ECB to extend its asset purchase programme beyond March 2017. At the end of July, the European Banking Authority published the results of the European banking sector's stress test. These showed the sector's resilience. From an average level of 13.2%, the banks'

Tier 1 ratio would fall to 9.4% in a crisis scenario. This is testament to the banks' recapitalisation efforts in recent years. In the first stress tests in 2011 and 2014, the banks' capital ratio came to 4% and 2% respectively below the current level. The latest round of tests, conducted at 51 banks, were purely indicative and not constraining - no limit was defined to establish whether a bank had passed or failed the test. The Italian banks, which are among the most fragile in the eurozone, positively surprised the markets, apart from Monte dei Paschi di Siena which saw its capital plunge into negative territory in the event of a crisis scenario. Deutsche Bank, Commerzbank, UniCredit, Barclays and Banco Popular also came out badly with a capital ratio below 8% after the test. In the United Kingdom, the Bank of England decided to ease its monetary policy in August. It cut interest rates by 25 bps to 0.25% for the first time since March 2009 and expanded its asset purchase programme. Purchases of government bonds will be increased by £60 billion in the next six months, taking them from £375 to £435 billion. The Bank of England will also purchase corporate bonds for a maximum amount of £10 billion per month over the next 18 months. Mark Carney, Governor of the Bank of England, left the door open for further measures if necessary but

PORTFOLIO MANAGEMENT REPORT / MANAGEMENT SOLUTION INVESTING IN BANQUE DE LUXEMBOURG FUNDS / YELLOW PROFILE - EUR / THIRD QUARTER 2016


PORTFOLIO MANAGEMENT REPORT

ruled out negative interest rates. In Japan, the central bank initially disappointed the markets at its end of July meeting, only increasing its ETF purchases from 3,300 to 6,000 billion yen per year. The market was also expecting a cut in interest rates and an extension to the government bond buying programme. But subsequently, at its meeting in September, it announced its intention to control the yield curve by intervening on the bond market with the aim of leaving its 10-year interest rate close to 0% while continuing to set short-term interest rates.

PORTFOLIO MANAGEMENT REPORT / MANAGEMENT SOLUTION INVESTING IN BANQUE DE LUXEMBOURG FUNDS / YELLOW PROFILE - EUR / THIRD QUARTER 2016


PORTFOLIO MANAGEMENT REPORT

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MARKET TRENDS Equity markets had a good summer. After the tremors in June, prompted by Brexit, investors were heartened that the time has come for more accommodative monetary policies almost everywhere. US and Chinese economic statistics were also reassuring, giving a welcome boost to risk assets. In emerging markets, the Brazilian stock market continued to rally (+35% since the start of the year), buoyed by hopes of reforms from the new Brazilian leader, Michel Temer, who succeeded Dilma Rousseff. Paradoxically, the bond markets continued to perform well. This asset class is benefiting from accommodative monetary policies worldwide. Aversion to risk is also high, exacerbated by fears about the financial health of Deutsche Bank which resurfaced at the end of September. In this context, the German 10-year Bund yield continued to be firmly entrenched in negative territory at the end of the quarter (-0.12%) while its American counterpart remained close to an all-time low at 1.60%.

PORTFOLIO MANAGEMENT REPORT / MANAGEMENT SOLUTION INVESTING IN BANQUE DE LUXEMBOURG FUNDS / YELLOW PROFILE - EUR / THIRD QUARTER 2016


PORTFOLIO MANAGEMENT REPORT

Equity markets' performances during the third quarter

Bond markets' performances during the third quarter

PORTFOLIO MANAGEMENT REPORT / MANAGEMENT SOLUTION INVESTING IN BANQUE DE LUXEMBOURG FUNDS / YELLOW PROFILE - EUR / THIRD QUARTER 2016


PORTFOLIO MANAGEMENT REPORT

On the currency front, the euro/dollar exchange rate was generally stable over the quarter, fluctuating between 1.10 and 1.13. Meanwhile, the pound sterling is still suffering from Brexit. The Norwegian krone was boosted by the sharp increase in oil prices in September following OPEC's decision to cut production.

Currencies' performances against EUR during the third quarter

PORTFOLIO MANAGEMENT REPORT / MANAGEMENT SOLUTION INVESTING IN BANQUE DE LUXEMBOURG FUNDS / YELLOW PROFILE - EUR / THIRD QUARTER 2016


PORTFOLIO MANAGEMENT REPORT

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PORTFOLIO Bonds

Absolute Return

Once again, the bond portfolio made a positive contribution to the portfolio's performance. Emerging market debt was the main contributor, benefiting from investors' search for yield as well as an improvement in the economic situation in these countries. In contrast, US government debt suffered slightly in the third quarter as the market started to factor in expectations of the next interest rate hike in the United States. Following the good performance of emerging market debt, we decided to reduce our position and invest the proceeds in Capital Gestion Bond Euro Plus. This is a more flexible bond fund which invests both in high-quality government debt and corporate bonds, with diversified currency exposure.

The alternative segment contributed positively to the portfolio despite mixed performances between different strategies. Long Short Equities benefited from the equity markets' return to normal after a volatility peak post-Brexit. The M&A strategy continued its solid performance since the start of the year. Among other successes, the Cigogne M&A fund benefited from the acquisition of SABMiller by AB InBev. At the other end of the scale, CTA and Global Macro strategies found the going harder as the bumpy bond and commodity markets weighed negatively on performance.

PORTFOLIO MANAGEMENT REPORT / MANAGEMENT SOLUTION INVESTING IN BANQUE DE LUXEMBOURG FUNDS / YELLOW PROFILE - EUR / THIRD QUARTER 2016


PORTFOLIO MANAGEMENT REPORT

Equities After a difficult start to the year for financial stocks, investors were reassured over the solidity of European banks following better-than-expected results from the sector's stress tests. This prompted a rebound in bank stocks, ushering the indices upwards in their wake.

Funds' performances during the third quarter

We took advantage of this rebound in equities to reduce our allocation in mid-July, as we considered that valuations were high in a persistently difficult economic environment. In addition, given the upcoming political events in the next few months (presidential election in the USA and referendum in Italy), which could increase volatility on the markets, we prefer to retain a measure of prudence.

PORTFOLIO MANAGEMENT REPORT / MANAGEMENT SOLUTION INVESTING IN BANQUE DE LUXEMBOURG FUNDS / YELLOW PROFILE - EUR / THIRD QUARTER 2016


PORTFOLIO MANAGEMENT REPORT

DISCLAIMER The information in this document is provided for information purposes only and shall only be valid at the time it is given. No guarantee can be given as to the accuracy or exhaustiveness of this information. The Bank shall not be held responsible for the future performance of these securities, nor shall it be held liable for such information or for decisions that a person may take on the basis of such information. Potentially interested parties must carefully consider the appropriateness of their investments to their specific situation and ensure that they understand the risks involved in their investment decisions.

PORTFOLIO MANAGEMENT REPORT / MANAGEMENT SOLUTION INVESTING IN BANQUE DE LUXEMBOURG FUNDS / YELLOW PROFILE - EUR / THIRD QUARTER 2016


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