Central banks are more ‘dovish’ than expected

Cross-asset strategy

In recent months, the main central banks have become more dovish. The ECB unveiled a comprehensive and targeted credit-easing package mitigating risks of tighter lending standards in the region, while, as expected, the Fed adjusted towards a more gradual hiking path than anticipated last December.

Meanhile, in Asia, the BoJ has negative policy rates while the People’s Bank of China is set to continue its easing policy.

Has the oil shock come to an end?

The bottoming of commodity prices in January occurred at lower prices than initially thought. High volatility during the adjustment of the supply glut should, however, prevail (e.g. the Brent has been up by around 40% since the low). Fundamentally speaking, there is little reason to change the view that the oil market will rebalance in the summer. Knowing that stocks remain at record levels, OPEC is producing at record levels and global growth uncertainties prevail, implying that there is less upside potential from current price levels. Meanwhile, geopolitics, which appears to be a potential game-changer, remains highly uncertain.

REGIONAL EQUITY STRATEGY

Euro-zone equities remain our strongest conviction

Overweight on euro-zone equities

We continue to remain overweight on euro-zone equities for several reasons: low oil prices, a weak euro, improved credit conditions in the periphery and a more accommodating fiscal policy, all of which should ensure that the region grows again by 1.8% in 2016.

Earnings growth should also continue to support euro-zone equities. The earnings season is holding up better than expected. MSCI Europe earnings growth (Q4 2015) is currently around 4%. We expect high single-digit earnings growth for the euro zone in 2016.

In this context, we are comfortable maintaining an overweight stance on euro-zone equities while continuing to underweight UK and US equities. We have also maintained our overweight on European small caps in order to benefit from domestic demand.

Adding tactical Emerging Market exposure

We have increased our exposure towards emerging market equities. We believe the region should be supported by:

• a stabilisation of the USD;
• a more-dovish-than-expected Fed;
• a commodity-price stabilisation;
• decade-low valuations and signs of stabilisation;
• a consensus positioning that remains underweighted in the region.

Neutral on Japan

In our view, liquidity support is still there as the BoJ continues to inject 80tn JPY/y and corporate profits remain supportive. We nevertheless remain vigilant and continue to monitor the uncertainties caused by emerging countries, Japan being one of the economies most exposed to these markets.

FIXED INCOME STRATEGY

Diversification out of low/negative-yielding government bonds

• We like high-yield bonds as they hold an attractive carry and valuation, and should continue their recovery. This, in a context of fading fears on growth.
• We are positive on inflation-linked bonds. The recent decline in inflation expectations has gone beyond the drop in commodity prices. We view this as a temporary phenomenon and expect consumer-price inflation data to rise gradually. The expected re-rating of inflation-protected bonds has started, albeit more significantly in the US than in the euro zone.
• We have maintained a long position on the Australian dollar, which has benefited from the dovish Fed announcements and the ongoing rise in commodity prices.

COMMODITIES STRATEGY

Acceleration in the oil-price drop

The bottoming in commodity prices this year, albeit at lower prices than initially thought, is a key point in our market scenario. Fundamentally speaking, we still expect a rebalancing of the oil market in the summer. During the adjustment, oil-price volatility should remain high.

Amidst the worldwide supply surplus, Saudi Arabia and Russia have proposed freezing output if they are joined by other producers. Iraq has indicated that it would back any decision to balance the market without saying whether it would freeze its own output. We think that, in the absence of a voluntary output cut, these talks will not alter market imbalances and the risk of storage-capacity breaches. In particular, a freeze at January levels would not really represent an effort for Russia, which was producing at record high levels that month. Nevertheless, it does indicate that the steep fall in prices is being addressed by producers.

Our constructive fundamental view on commodity prices is also based on the stabilisation of the USD due to a slow and shallow Fed hike policy.