Clearer signals from the US

Cross-asset strategy

We think that the US is experiencing a soft patch, but will avoid recession in the next twelve months, as consumer spending continues on a solid path and leading indicators in the manufacturing sector – e.g. the difference between new orders and inventories – point to a stabilization of current levels.

We also note that the retail sales data for the month of January came out ahead of expectations (+0.2% MoM vs +0.1% MoM expected), coupled with upward revisions for the previous month. Further, jobless claims have been recently reported better than expected at a level not seen since mid-December, a welcome validation of a robust US labour market.

Historically, a rise of more than 10% in jobless claims over one quarter has occurred during US recessions. This measure has receded significantly after rising to 6% in mid-January, allowing an assessment of the US economy in (quasi) real time. Looking forward, we will look out for other tangible signs of improvement in incoming data from the US consumer and manufacturing sectors.

Emerging market headwinds are diminishing

The rebalancing of the Chinese economy is a long-lasting process, and economic indicators do not point to a hard landing. Market focus is on exporting deflationary pressures through the Yuan exchange rate regime. In the meantime, we note a rise in the Brazilian manufacturing PMI for the second consecutive month.

Looking forward, new impulses from the PBoC, the stabilisation of the USD and potential green shoots in Brazil will be crucial to further diminishing headwinds in emerging markets.

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, 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 around 2% 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 around 4% for the time being. 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-cap equities in order to benefit from domestic demand.

Neutral on Emerging Markets

Emerging market valuation is well below its 2008 level. The region will continue to be considered a value trap until we have clear signs of a stabilization in growth anticipations. Given the current recessionary backdrop in many emerging markets and the expected long-term earnings growth, valuations – in our view – are not that attractive. We maintain a neutral stance on 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, as we 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 are positive on High-Yield bonds. The recent spread-widening, led by the rising default risk in the Energy sector and capitalization fears in the Banking sector, reflects a bleak scenario. In our more constructive view, we see this pick-up in yields as a protection.
• We are positive on Inflation-linked bonds. The recent decline in inflation expectations has been driven by the fall in commodity prices. We view this as a temporary phenomenon and expect consumer price inflation data to rise gradually. This implies a re-rating of inflation-protected bonds over the course of the coming quarters
• Our constructive view on commodity prices is also reflected in our exposure to emerging market debt, both in local- and in hard-currency terms.
• Meanwhile, we maintain a below-benchmark duration.

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 during the summer.

In the meantime, the current supply glut is adding more than 1 million barrels to global stocks every day. During the adjustment, volatility in the price of oil should remain high. Amidst the worldwide supply surplus, Saudi Arabia and Russia have proposed to freeze output if they are joined by other producers. Iraq indicated that it would back any decision to balance the market without indicating whether it would freeze its own output. We think that, in the absence of a voluntary output cut, these talks do not alter market imbalances and risks 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.

Finally, we note that the price of oil (Brent) has not fallen below USD30/bbl since January 21st. Technically speaking, it may take some more time to rebound, but the current consolidation might constitute a basis to advance towards USD40/bbl.

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.