US: GDP growth acceleration in the second half of 2016 and in 2017

Ahead of the Presidential elections of November, the economy is showing signs of sustainable relief that should last until the end of the year and into 2017. A combination of positive signals from household consumption, the labour market, more dynamic exports and a more solid real estate market lead us to believe that the macroeconomic environment is in a virtuous cycle.

Household consumption remains the US growth engine, along with a strengthening labour market. Core retail sales appear to be volatile but households’ confidence has been on an increasing trend since bottoming at the end of 2011. The labour market has reported a weaker-than-average figure of 151K in the creation of non-farm payroll jobs in August – but the trend remains positive. In addition, most job creations are full-time and not the precarious part-time positions that do not always give access to benefits such as social security, medical insurance and retirement contributions. Full-time positions also facilitate residential investments. Sales of new constructions have been on the increase since 2010 and the National Association of Home Builders, NAHB, reports a Housing Market Index above 50. 

Brexit currently has had no impact on the economic recovery of the Eurozone

The Eurozone, like the US, seems to be on a steady and sustainable recovery path in spite of Brexit, which currently has had no impact on the economic recovery. However, negotiations have yet to start and will last for a maximum of 2 years. Economists predict that growth will continue to progress, thanks to a winning combination of economic variables, which include the labour market, consumption, residential and business investments, and exports.

Truly, Brexit currently has had no impact on the economic recovery. The PMI for the Euro area stands at 52.9. The UK’s PMI took a dive after Brexit but has spiked again to its former level. GDP growth across countries for the second quarter is positive for all countries involved except for Greece, which is battling chronic debt issues. Investment and consumption are the main GDP growth drivers. The latest activity surveys show a steady growth path and, more importantly, the economic sentiment index is up. The labour markets are slowly improving in all Euro-area countries, especially Spain and Germany. Consumer confidence is also high in those two countries, whereas it is below the Euro-area average in France, Portugal and Italy. This could be attributed to dissatisfaction with the current political situation and the anticipation of upcoming elections as the European political agenda is full for the rest of 2016 and the first half of 2017. We expect consumption to grow by 1.5 to 2%. Euro-area retail sales have been on an increasing trend since 2013. A come-back of inflation might impact households’ disposable income, but this is not yet in sight. Spain and Germany also stand out, if we look at residential investments. Business investments should stay on a slow but steady path. Increasing growth is resulting in increasing intra-euro exports. The export performance index, the relative success or failure of the efforts of a firm or nation to sell domestically produced goods and services in other nations, also points to Germany, Spain and Ireland as the good students of the Euro zone.


Safe from Brexit: are Emerging markets getting rid of headwinds?

According to the IMF, the UK referendum outcome of late June, in which the UK  opted to leave the EU, has resulted in the revision of the baseline global growth forecast for developed countries – but not for emerging countries, which remain untouched by this particular political uncertainty-triggering event.

Meanwhile, consensus forecast revisions for GDP growth are neutral-to-positive for China and India and especially positive for Brazil and Russia. Growth has stabilized in China. The country is evolving from a developing to a developed country. The services PMI index is above 50, as is the composite. It is still below 50 for the manufacturing sector, but on an improving trend. The Chinese government and the People’s Bank of China have been hands-on in providing the necessary tools for the economy to get over last year’s roadbumps. Meanwhile, the renminbi exchange rate is decreasing, supporting exports.

At the time of writing, Emerging market securities are our biggest conviction. 




Equities vs bonds: where do we stand?

Equities are relatively attractive, but a clear catalyst, as further re-rating is needed. On the other hand, bond yields are under pressure, with central banks being globally more dovish than expected this year, and the search for yield remains a central theme for investors. In addition, oil markets are slowly returning to a balanced situation, leading to stabilisation in the commodity markets. This is good news for high-risk assets, especially for emerging, high-yield and inflation-linked bonds.

However, although investor sentiment has recently improved, we remain cautious due to a busy political agenda (elections to the Russian parliament, regional elections in Germany, a constitutional referendum in Italy and the presidential election in the US).

In this context, we currently have a strategically neutral position in equities versus bonds, and an important overweight in emerging markets (bonds and equities) and high yield.

We favour Emerging markets 

Emerging markets are currently our strongest conviction for 5 reasons:

1. Attractive relative valuation
2. Stabilising economic growth
3. Less fear of a USD appreciation and bottoming-out of commodity prices
4. Highest expected return
5. Attractive technical picture

Their economic activity is improving and they face fewer headwinds. 

Convictions on credit

On the credit side, we still like high-yield bonds, as they hold an attractive carry and valuation.
We are also overweight credit on the European and US sides.

Convictions on government bonds

As a result, our fixed income allocation is diversifying out of low-/negative-yielding government bonds. We have more conviction on Emerging markets and are overweight in both local and hard currency.

We are keeping a neutral but well-diversified exposure to core and peripheral European bonds, US corporate bonds and inflation-linked bonds. Breakevens are pricing in 1.5% inflation for the coming years and this looks overly cautious. 

 

COMMODITIES STRATEGY

Oil prices under 50$/barrel

• Oil prices oscillated into the 40$-50$ range per barrel in August.
• OPEC production has reached record highs and stabilised on those levels, with Iran producing massively to catch up with its pre-embargo levels, a major source of revenue for a country that badly needs it.
• US oil production is the only leverage and its decrease is on track, but the US rig count has bottomed.
• Benefiting from the momentum, gold prices have been pulled up not only by the strong decrease in US real rates but also by a growing number of ETFs buying gold. This has pushed prices upwards.