Global macroeconomic newsflow remains positive

Executive Summary

• While the global economy continues to grow at a moderate pace, balance sheets of the major central banks continue to provide support.
• Donald Trump’s election has increased market uncertainty. Following the US election, we will monitor hints on the composition of the future White House staff and cabinet members.
• As we now have stronger convictions on a longer-term rise in US bond yields, we decided to further implement a short duration on US Treasuries.
• We reduced our emerging market exposure both before and after the election of Donald Trump as the 45^th president of the United States. 

CROSS-ASSET STRATEGY

United States: growth should continue

After a weak H1, GDP rebounded at a 2.9% annual rate in Q3, and ISM indices continue to point to close to 2% growth over the rest of the year. Meanwhile, labour market conditions continue to improve, with wages gradually accelerating towards 3%. These recent developments justify a gradual Fed Funds rate hike and, in this context, we still believe the Federal Reserve will hike its interest rate by 25 bps in December.

Elsewhere, the US election results came as a surprise. While it is too soon to revise our scenario, Trump’s platform points to slightly faster growth in the short run (but not before the end of 2017) and higher interest rates … unless a risk-off environment lasts long.

Euro zone: positive economic momentum

For the time being, there is no sign of the recovery being derailed by Brexit uncertainty. The composite PMI indices even gained some momentum in October. Meanwhile, the accommodative monetary policy continues to support easier credit conditions for both firms and households. Sources of political uncertainty are, however, manifold :

• constitutional referendum in Italy on December 4^th;
• elections in the Netherlands, France and Germany in 2017;
• start of the Brexit negotiations.

All in all, we believe GDP growth should be around 1.5% in 2016 and 2017. Brexit-related uncertainty could, however, resurface when negotiations start in earnest, and the road ahead is paved with political risks aplenty.

Emerging markets: growth still on track

Economic momentum continues to improve in the emerging markets. Manufacturing PMIs are now increasing in almost all emerging regions. Brazil’s manufacturning PMI remains strongly below 50 – the threshold that divides growth from contraction – but has improved significantly, while Russia’s manufacturing PMI has passed the 50 mark. Growth expectations are now positive once again in these two commodity-dependent emerging markets. India is particularly attractive among the BRICs, with the highest GDP growth expectations close to 8, while consumer price inflation is under control. As a result, consensus forecast revisions have been bottoming out.

Central bank expansionary policies remain in place

While the global economy continues to grow at a moderate pace, balance sheets of the major central banks have increased by more than 30% over the past twelve months and continue to provide support to risky assets:

• markets are now pricing in one Fed hike by the end of this year;
• the Bank of England remains supportive. It is, nevertheless, taking inflation risks into account and has now evoked fiscal stimulus;
• the Bank of Japan is innovating through yield-curve targeting, while the ECB is expected to clarify its intentions at December’s FOMC meeting.

The surprising Trump victory

As with Brexit, the US elections delivered the result the markets and many political observers believed the less likely: Donald Trump winning the Presidency. As Congress remains controlled by the Republicans, the US will now have an undivided government.

Donald Trump has clearly gained in credibility, in particular after his acceptance speech. The fact that, despite the reluctant support of many Republican leaders, he won, may lead to a shift in the Party’s attitude: from now on, the President’s proposals may gain a lot more support from Congress than was expected.

This said, there is a substantial amount of uncertainty about what a Trump presidency will exactly mean for the US economy as well as for markets. It will take weeks and possibly months for this uncertainty to dissipate. In the meantime, the markets will try to guess whether Trump will remain the populist of the campaign trail or turn into a more pragmatic and realistic politician.

Some clues will be given in the coming days, when we learn more about the composition of the future White House staff and also, of course, of the possible members of his cabinet.

Cross-asset: neutral on equities

Due to various political events (Brexit, result of the US presidential elections, Italian constitutional referendum), the medium-to-long-term economic risk has increased. However, for the time being, the macro news flow remains positively oriented, while central banks have maintained a dovish stance, providing ample liquidity to the markets. We now have a more constructive mid-term stance in equities versus bonds, though we remain cautious in the short term, due to the uncertain political environment.

REGIONAL EQUITY STRATEGY

Constructive on US equities

Economic growth is gaining momentum in the US, and earnings growth should improve over the coming months and turn positive on a year-on-year basis. We are at the end of the earnings recession and revisions are now positive. The last market decline did not come with any negative earnings growth revisions, so price-earnings has decreased and we can now expect some slight expansion in multiples. Also, the US tends to outperform in periods of market uncertainty.

Slightly overweight on euro-zone equities and negative on the UK

Driven by an attractive valuation, an increase in corporate profits and positive investors’ sentiment – despite the political uncertainty – we still believe in the possible re-rating of euro-zone equities . Meanwhile, we remain negative on UK equities:

•  UK market performance will depend mainly on a potential depreciation of the GBP;
• the relative valuation is rather expensive, as earnings have dropped in recent years;
• earnings growth should benefit from a weaker GBP and stabler commodity prices. As a result, earnings revisions are now clearly positive, reflecting the positive forex effect.

Implementing Brexit remains an important risk, especially now that the UK Parliament has to give its approval before the process can begin.

Emerging markets remain attractive, but…

Emerging markets are still attractive for the following reasons:

1. highly attractive relative valuation vs other markets;
2. stabilising economic growth;
3. the bottoming-out of commodity prices;
4. the highest expected return: emerging markets have an attractive medium-term expected return, thanks to higher expected growth;
5. attractive technical set-up.

However, both before and after the US presidential elections, we reduced our emerging market overweight, to protect our portfolio against the election of Donald Trump and its possible protectionist measures.

FIXED INCOME STRATEGY

Broad diversification out of low-yielding bond segments

• Bond yields troughed this summer after the Brexit referendum and, following Donald Trump’s victory, we now have a stronger conviction on a longer-term rise in US bond yields. This being the case, we decided to further reduce our duration on US Treasuries.
• We also decided to take profit on our US Investment Grade credit exposure, while reducing the exposure on European IG credit.
• We are moderately positive on high yield. The significant spread-tightening this summer has reduced the potential, but the carry remains attractive.
• We remain positive on emerging debt, both in local and in hard currency, but slightly decreased our exposure in anticipation of a Trump election.
• We are positive on inflation-linked bonds, expecting an increase in headline inflation numbers at the turn of the year. The oil-price comparison-base effect represents the main driver, but wages are accelerating, too. US headline CPI should come in at above 2% at the turn of the year for the first time since mid-2014 and reach levels close to 3% in Q1 2017. Euro-zone headline CPI should rise towards 1% early next year, a level not seen in the region since late 2013

COMMODITIES STRATEGY

Focus still on oil

Already last month, OPEC members had reached an agreement to reduce oil production to 32.5 - 33 million barrels per day (mb/d).

The deal, once formally agreed during the upcoming November 30^th meeting, could lead to a global supply-demand balance by mid-2017. As US production has stopped decreasing and should remain stable, based on the most recent EIA forecast, the OPEC freeze should allow the rising demand to converge faster towards a global supply.

This agreement should support oil prices, as the temptation to sell could fade, and therefore stabilise around USD50/b.

However, risks persist regarding the effective implementation of the deal, as OPEC members still increased production in October while agreeing to freeze production. Further US oil production is likely to rise if the Trump administration acts in favour of drilling, as could be expected.