Draghi disappoints

Cross-asset strategy

Investors have been closely watching Draghi in recent weeks, as he had indicated, in September, in a dovish message that the ECB would do all it took to support inflation. That communication made investors speculate on an increase of the ECB’s monthly asset purchases to EUR 80 bn.

Unfortunately, the ECB disspointed. Although it decided to further cut deposit rates to -0.3% and extend the asset purchase time frame to March 2017, Draghi kept the amount of asset purchases at EUR 60 bn a month.

However, the short-term disappointment is clearly not a hurdle for our positive scenario. The ECB remains extremely accommodative and continues to provide, in combination with the actions of the Bank of Japan, liquidity support.

Valuation remains attractive

Meanwhile, equity market valuations remain quite attractive. The valuation of the MSCI World is in line with its median (unchanged since 1991) at around 15.5. Equity markets aren’t cheap any more, but are not expensive either.

Fed hikes rates for first time in December

The last Fed committee resulted in an interest rate hike of 25 basis points, in line with our scenario. From now on, investors will pay attention to the communication on how the Federal Reserve intends to manage this cycle of increasing rates. Taking into account the current economic and financial environment, futures interest rate increases will be done gradually and with cautiousness.

The current accommodative actions of the ECB and the BoJ may also accentuate the cautiousness with which the Fed proceeds. In fact, a strong dichotomy between Fed policy and that of other central banks seems unlikely. While the Public Bank of China has already decreased its rates and ECB President Mario Draghi, at the meeting on October 22, announced the very high probability of further policy-easing by year-end, we consider that liquidity will globally continue to be abundant, mainly in the Eurozone and Japan, supporting risky assets.

REGIONAL EQUITY STRATEGY

Strong framework for Eurozone equities

Eurozone equities remain top of the pile

Eurozone equities continue to be supported by several elements. As mentioned above, this area is displaying better economic momentum and proving itself more resilient than the US. Moreover, liquidity conditions continue to be more supportive in the single-currency area, even though the ECB has not increased its monthly asset purchase amount.

Regarding earnings, while European earnings negatively surprised for the third quarter, investors still expect strong growth for the full year (above 10%, while US earnings growth is expected flat, according to Datastream). Also for next year, expected earnings growth remains supportive, with high single-digit projections.

In the meantime, the relative valuation of the Eurozone is quite attractive relative to the US. The zone’s price/earnings – now close to its median – is appealing (relative to its expected long-term growth), while the US is hovering towards the top of its long-term valuation range. As a consequence, we have kept our strong overweight on Eurozone equities, while staying underweight on US and UK equities. We have also maintained our overweight on European small-cap equities.

Neutral on Emerging Markets with a tactical overweight on Chinese equities

Incoming economic data remains crucial to validating a bottoming-out of the emerging economies. In our opinion, taking into account the current uncertainties on the economy and expected long-term earnings growth, valuations do not look so cheap – the main reason for maintaining a neutral stance on the region.

Nevertheless, among the emerging countries, we continue to favour China. We consider that the stress surrounding a Chinese economic "hard landing" is receding as investors seem to have now integrated a growth scenario below 7%. Also, given the policy actions announced during the Central Committee Plenary session, the achievement of a 6.5% growth target over the next 5 years is credible. Finally we see that valuations of Chinese companies are attractive, in absolute terms, relative to other emerging markets.

Still positive (but cautious) on Japan

The liquidity support is still here, as the BoJ continues to inject 80tn JPY/y, and has maintained the Yen at this current (cheap) level for long enough to support the progress of the structural reforms of both Japan and its corporations.

We nevertheless remain vigilant and continue to monitor the uncertainties caused by emerging countries, as Japan is one of the economies most exposed to these countries.

FIXED INCOME STRATEGY

We have maintained our short duration and our preference for further diversification

The latest declarations from the main central banks have been reassuring to our fixed-income strategy. While the Fed seems ready to hike its rate for the first time in 7 years, we are still underweight in government bonds as there is less of a cushion for absorbing any increase. We have also maintained a below-benchmarkt duration.

Consequently, we continue to prefer diversification away from government bonds to to US investment grade corporate bonds (hedged in duration), high yield and emerging debt.

We have kept this exposure to the US dollar unhedged.

COMMODITIES STRATEGY

No clear signals to justify turning positive

Though the commodity index continues to be strongly impacted in 2015, the signals have not been strong enough for us to turn positive on the asset class.

Oil: Macro trends have been a headwind for commodities since the beginning of the year. Low nominal output growth and USD strength are factors explaining the decline in commodity prices and, while global GDP growth has slowed down since 2005-07, consensus forecasts continue to be revised downwards. The positive comes from the decrease in US oil production, which could make the global oil market more balanced in the coming quarters, potentially leaving the global market imbalanced. However, even if oil prices managed to find a bottom, uncertainties remained, especially on the demand side.

Base metals continued to be penalised by the sluggish activity in the manufacturing sectors, mainly in the emerging markets. For base metals such as copper and nickel, the efforts made to adjust production downwards could support prices in the coming years if the economic slowdown in the emerging markets, and China particularly, softens.