NEWSLETTER "2011 Outlook" Workshop January 19, 2011
"2011: Squaring the circle?" Will the recovery in the developed countries be sustainable? Is inflation a threat to growth in the emerging zone? Is the sovereign debt issue starting to be resolved? Which strategies and portfolio allocation should we adopt for early 2011? Just some of the questions addressed at Natixis Asset Management's "2011 Outlook" Workshop attended by some 380 participants on January 19 and hosted by Pascal
"The broad-based recovery in activity allows us to again take on risk in some asset classes: equities but also high-yield bonds." 2010 was not without surprises and 2011 could have some new ones in store. As we begin the year, four elements structure the economic and financial landscape: problems with the financing of sovereign debt particularly in the euro zone, uncertainties about the US economy Pascal Voisin which is sending contradictory signals as to the CIO of depth of the recovery, euro/dollar exchange Natixis Asset Management rate volatility and the continued growth of the emerging countries. This latter point finally enables us to foresee a decoupling phenomenon for these economies relative to those of the western countries. Faced with these trends, three key messages. Firstly, the need to remain vigilant since the issues surrounding sovereign debt have yet to be resolved. The broad-based recovery in activity allows us to again take on risk in some asset classes: equities but also high yield bonds. Lastly, the valuation levels of a number of emerging countries and signs of inflationary strains in some (China, India, etc.) argue for a more cautious approach.
Voisin, Chief Executive Officer, Philippe Waechter, Chief Economist, Ibrahima Kobar, CIO Fixed income, Emmanuel Bourdeix, CIO Equity, Asset Allocation and Structured Products and Franck Nicolas, Head of Global Asset Allocation and ALM.
The Natixis Asset Management Workshop on January 19 gathered some 380 participants. www.am.natixis.com CORPORATE AND INVESTMENT BANKING / INVESTMENT SOLUTIONS / SPECIALIZED FINANCIAL SERVICES
A recovery subject to constraints but a recovery nonetheless "The recovery in activity promises to be more robust and more autonomous than in 2010. It will, however, be subject to constraints which will generate volatility."
Philippe Waechter Chief Economist
Growth to be more autonomous and more robust
World business indicators and PMI/Markit Survey
Having been kick-started by intervention from governments
and central banks in the spring of 2009, the recovery
paused for breath during the summer of 2010. The
emerging economies, which had played a major role in
this rebound, needed a period of consolidation while
the stimulus effects of fiscal policies were exhausted.
Quarterly change/Annual rate
35 October and November
world trade are also returning to a positive trend.
Industrial production (Source CPB)
Growth looks more homegrown than a few months
PMI/Markit Survey – World Manufacturing Sector (right-hand scale)
ago. It should be more robust and more sustainable,
World trade in volume (Source CPB)
Source: Datastream – Natixis Asset Management
reflecting the behavior of the economic players more than the impetus coming from economic policy stimulus.
…but a recovery without a catch up A broad-based recovery…
Within the industrialized countries, the growth rate seen since
All countries are recording signals consistent with a recovery in
the recovery has been close to its pre-crisis level. There is no
activity: growth in orders and a relative decline in inventories,
catch-up phenomenon. This means that strains on productive
whether in the United States, the euro zone, Russia or Asia.
capacity and the labor market will be limited.
Japan is a laggard.
At the end of 2010, employment in both the United States and the euro zone was markedly below pre-recession levels.
Euro zone - Quarterly GDP growth and New Orders to Inventories ratio
New Orders to Inventories ratio
Households remain worried and should continue to pay down debt.
In other words, the signals coming from the corporate sector
are fairly positive but households remain affected by the labor
market which is seeing only a slow, inadequate recovery, a
sometimes excessive level of debt and, in the US case, a real
estate market which remains weak.
Quarterly GDP growth
This explains why there is growth but without a catch up in
line with the GDP trend growth that would have been seen
without the recession.
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Source: Datastream – Natixis Asset Management
2 / NEWSLETTER - JAN UA RY 2 011 / / / " 2 011 OUT L OO K " WO R K S HO P - PA R I S
Increased divergence within the euro zone countries
The growth differential between the northern countries in
the euro zone (Germany, France, etc.) and those in the south (Italy, Spain, Greece, etc.) should remain in 2011. To this we
Industrial production (base 100 - H1 2008)
can add the issue of sovereign debt which is creating more
The Europeans want to rebalance their internal situation by
gradually improving their public finances and finding a solution to the sovereign debt issue. This is why growth is modest and monetary policy will de facto remain accommodative this year.
jan-10 Euro zone
Source: Datastream â€“ Natixis Asset Management
"To curb the inflation generated by rising commodity prices, the emerging countries may have to revalue their currencies."
Soaring commodity prices are stoking inflation
CRB index on commodities 650 600 550 500 450 400 350 300 250 200 150 1991
One major reason for the rise in commodity prices is the change in the structure of demand. In the oil market, for example, the growing need of the emerging countries is such that their relative weight in demand is becoming virtually equivalent to that of the developed countries. This change in demand is being experienced by numerous commodities leading to upwards pressure on prices. This is shown in the CRB index chart. Furthermore, the
Source: Datastream â€“ Natixis Asset Management
monetary conditions facilitate the taking of positions in this type of asset. This increase in prices is feeding through to higher inflation, particularly in the emerging countries. In order to curb this, governments are currently using the interest rate weapon. However, given that these prices are global, they may move to revalue their currencies, which would be more effective. This could be the case for the yuan, the Chinese currency. The Western countries are also affected by these price rises. However, the central banks are currently assuming that this imported inflation will not spread to the rest of the economy and, notably, that it will not lead to pressure on wages. The underlying inflation rate is low and should remain so in the absence of any pressure on productive capacity and given high unemployment. Both the Fed and the ECB should maintain low rates in 2011.
W W W. A M . N AT IXIS.COM
Sovereign risk, bis repetita "The high yield securities market offers opportunities given their yield and a default rate below its long-term average."
Ibrahima Kobar CIO Fixed income
Sovereign risk is not the same everywhere
real estate bubble which impacted the banking system.
07 /1 2/ 29 07 /0 2/ 29 08 /0 4/ 29 08 /0 6/ 29 08 /0 8/ 29 08 /1 0/ 29 08 /1 2/ 28 08 /0 2/ 29 09 /0 4/ 29 09 /0 6/ 29 09 /0 8/ 29 09 /1 0/ 29 09 /1 2/ 28 09 /0 2/ 29 10 /0 4/ 29 10 /0 6/ 29 10 /0 8/ 29 10 /1 0/ 29 10 /1 2/ 10
restructure their debt as of 2013, the measures taken by Spain
While Greece, Ireland and Portugal will probably have to
while, for Ireland and Spain, they are due to the bursting of the
and Portugal, the difficulties arise from soaring public deficits
similarities but there are also some differences. For Greece
and is now affecting Portugal and Spain certainly has some
Spreads versus bunds (10-year) 1200
Tensions remain high. The crisis which hit Greece and Ireland
look, in our view, enough to reassure markets.
Source: Bloomberg - Natixis Asset Management
Towards a steepening in the yield curve in the United States The upside potential for long-term interest rates looks limited in the euro zone.
The recovery in activity and inflationary expectations linked to
As long as it needs to support European States by purchasing
curve in the US although the Fed's quantitative easing policy is
debt, the ECB will hesitate to raise its official rate for fear of
slowing this move. The Fed is effectively committed to purchasing
triggering a systemic crisis. It will thus take time to follow
US $600 billion of securities by June 2011.
rising commodity prices are driving a steepening in the yield
the Fed were the latter to decide to increase rates and, in any event, the increase should be smaller. Monetary policies should thus remain accommodative. For example, during the 2010 second half, we see the German bund yield at between
CDS indices: Xover vs IG Main
2.90% and 3.40% versus 3% currently. 11 10 9
Strong outperformance of euro High Yield
forecast to November 2011 versus 4.4%).
4 â€‰ / NEWSLETTER - JAN UA RY 2 011 / / / " 2 011 OUT L OO K " WO R K S HO P - PA R I S
/1 1 2/ 01
/0 7 2/ 04
/0 7 2/ 01
/0 6 2/ 10
for this asset class rate below its long-term average (1.8%
3 /0 6
securities market due to their yield and an average default rate
opportunities are currently to be found mostly in the high yield
Credit remains attractive in terms of valuation. But the
A market favorable to high yield bonds
Source: Bloomberg - Natixis Asset Management
The year of equities "In a market with 10% upside potential, investors should gradually build positions in euro zone equities and adopt a more cautious approach to the emerging markets."
Emmanuel Bourdeix CIO Equity, asset allocation and structured products
relative to the other asset classes. The rate of profit for US
companies is currently well above the yield on securities,
+1 Std -1 Std (10 Years)
Average +1 Std (10 Years)
Earnings Yield - Bond Yield 10 Year Average
companies to take on debt to finance share buybacks or
a situation which is extremely rare and should encourage
equities in 2011. Valuation multiples are reasonable, particularly
The conditions look to be in place for another strong year for
Earning Yield - Bond Yield (based on 12 Month forward earning for S&P 500 and 10 Yard T-Bill Yield)
Valuations attractive relative to other asset classes
Source: Datastream - Natixis Asset Management
Markets could see 10% upside With prospective valuation multiples of around 11 times,
We prefer US and European equities and particularly those in
earnings growth of between 12% and 15% and the resurgence
the euro zone where there is catch-up potential once sovereign
of M&A transactions, equity markets should see upside of
debt issues are mitigated.
around 10%. The market is likely to benefit from the return of institutions who abandoned equities firstly due to the crisis and then in anticipation of new regulatory standards set to penalize
Take profits on cyclicals
the asset class.
In 2010, the market was positive for cyclicals to the detriment
The increase will not be linear. The market should alternate
of defensives and financials and it now seems appropriate to
between periods of low volatility (when corporate earnings
take profits on the former. It is still too early to be picking up
will take precedence over the macro economy) and sharp
financials, expect for the retail banks whose credit businesses
corrections (the inverse configuration). As a result, we continue
should benefit from a much steeper average yield curve than
to favor a tactical, flexible approach and would take advantage
of the low levels of volatility to purchase attractively-priced
We remain positive on small and mid caps, largely due to the
options offering downside protection.
acceleration in merger and acquisition activity.
A preference for European equities While the emerging market fundamentals remain positive, this year we are more cautious on the asset class. Their growth differential is already priced in whereas, on the contrary, the inflation risks (and potentially a contraction in activity were monetary policies to become too restrictive) have yet to be fully discounted. W W W. A M . N AT IXIS.COM
Asset allocation: between convalescence and normalization "Lighten holdings of bonds, cyclical stocks, gold, the Swiss franc and the yen and add to positions in defensives, high yield bonds, Russia and the Asian currencies."
Franck Nicolas Head of Global asset allocation and ALM
The equity markets are no longer as risky
Global growth and S&P 500 risk premium (%)
It is time to stop believing in three widely-accepted ideas: The first is that equity markets will generate low returns over
a prolonged period. This should now be less true: activity is
showing a slow but more solidly-based pick-up, company
balance sheets are healthy and the measures taken to consolidate the public finances are in the right direction even if there is still some way to go. Everything points to a recovery in
the equity markets and the risk premium which remains high
(see chart) should decline if reassuring news starts to come
through on the public finances. We can thus start to lighten
Global growth (%)
S&P 500 risk premium (%) 61 64 67 70 73 76 79 82 85 88 91 94 97 00 03 06 09 12 15
holdings in hedging assets and build positions in long-term
Source: Shiller, FMI, Natixis Asset Management
assets: equities, commodities, etc.
The end of "binary takes all"
A preference for high yield bonds
The second premise: it is a two-speed market and only a few
Our asset allocation has changed (see table). Government
sectors will drive it higher. The improvement in the cycle now
bonds (Germany and France) have played an effective role as
argues for portfolio diversification. The period of "all emerging"
safe havens but there is no longer much to go for in this asset
or "all cyclical" is now behind us.
class. We would lighten positions in favor of private bonds including high yield.
Emerging export plays are less attractive Lastly, even if the emerging markets remain an attractive investment theme on a long-term view, 2011 could see an inflexion point in these markets given the inflationary pressures and governmental determination to encourage domestic consumption.
"In 2011, investors will be better off playing the rise in emerging market currencies than emerging equities and should prioritize securities in the euro zone."
6 â€‰ / NEWSLETTER - JAN UA RY 2 011 / / / " 2 011 OUT L OO K " WO R K S HO P - PA R I S
Lighten on cyclicals and add to defensives In equities, we would prioritize stocks in developed countries.
Playing the appreciation in emerging currencies
We are effectively cautious on emerging equities with the
Similarly, we would start to reduce exposure to gold even if
exception of Russia where we would invest to play the oil
the Chinese central bank will continue to purchase gold to
increase its reserves.
At sector level, we would lighten on cyclicals, build positions
On the currency side, there is some upside potential for the
in defensives and look to pick up financials as sovereign debt
emerging currencies. On the other hand, we would reduce
issues are gradually resolved.
exposure to the two currencies that served as safe havens last year: the yen and the Swiss franc.
Asset allocation – Model portfolio for 2011 Fixed income Cash € Government bonds 1-3 Government bonds 1-7 International sovereign Euro inflation International inflation Credit High yield Emerging
Currencies Euro Dollar Sterling Yen Swiss franc Australian dollar Canadian dollar Emerging currencies
+ -= + = + = = + + ++ ++ ++
Alternative assets ++ + + = ++ + + = + = = -
Euro Europe Europe ex euro Cyclicals Growth Financials Defensives Small caps US Japan Pacific Emerging Asia Emerging Europe Latam
= + ++ + + -
Gold Oil Industrial metals Agriculture Real estate Hedge Fund Volatility
Scale from - to ++
Source: Natixis Asset Management Achevé de rédiger le 24/01/2011.
NATIXIS ASSET MANAGEMENT IN BRIEF Natixis Asset Management is the European expert of Natixis
of institutional investors, large companies, distributors and
Global Asset Management, one of the fifteen largest asset
managers in the world with USD 526.5 billion of assets
Natixis Asset Management covers all the main asset classes,
under management and 2,800 employees.
geographical regions and investment styles and benefits
Natixis AM has some 670 employees and is one of the top
from recognized expertise in European equities, fixed
European asset managers with close to EUR 304 billion
income, money market and balanced asset management,
under management. It offers a comprehensive range of
with leadership positions in all these areas.
products and investment solutions to a diverse client base Written on 31/01/2011
///// Contact us : email@example.com
W W W. A M . N AT IXIS.COM
NATIXIS ASSET MANAGEMENT Registered Office: 21 quai d’Austerlitz - 75634 Paris Cedex 13 Tel: + 33 1 78 40 80 00 - Limited Liability Company, Share Capital 50 434 604.76 euros RCS Number 329 450 738 Paris Regulated by AMF under n° GP 90 009
DISLAIMER - This document is destined for professional clients. None of the information contained in this document should be interpreted as having any contractual value. Natixis Asset Management will not be held responsible for any decision taken or not taken on the basis of information contained in this document, nor in the use that a third-party may make of it. The opinions expressed in the research and analyses are the sole responsibility of their authors and are not necessarily shared by Natixis Asset Management. Natixis Asset Management shall not be held liable for the accuracy and exclusivity of the information provided. The funds mentioned in this material are not registered or authorized in all jurisdictions and may not be available to all investors in a jurisdiction. Please refer to legal information of this material before any investment.
Natixis Asset Management - Communications Department - Heading picture: © Shutterstock - Inside photos: © Fabrice Vallon