Optimism of all the rage… in a dense fog

8 janvier 2018 par Véronique Riches-Flores

2018 has started on a confident note. After a very strong end to 2017, when global economic growth probably accelerated back over 4%, impressive indicators in early 2018 mean that there is no room for scepticism: growth looks like it is here to stay. There is plenty of evidence to support that view, including exceptionally loose monetary conditions at the global level, an upturn in business investment and international trade, a widespread decline in unemployment, and at least temporary support from the US tax reforms adopted late last year. To cap it all, wealth effects are increasingly visible, driven by exceptionally high valuations for financial and real-estate assets.

2018 Outlook – Welcome to Annapurna

19 décembre 2017 par Véronique Riches-Flores

Summary – Current economic trends seem particularly favorable, but after taking a step back, we are inclined to be more circumspect than the consensus of economists on the outlook for 2018. Our worldwide scenario has changed little since September. Our global GDP growth forecast for 2017 remains the same, at 3.6%, and we have lifted our 2018 scenario slightly to 3.3% from 3.2%. Upward revisions to our 2017 estimates for the developed world offset the declines we project in emerging markets. Meanwhile, we continue to foresee a modest global slowdown in economic activity next year as a result of reduced US and Chinese growth.

In this context, and amid the structural changes underway, worldwide inflation does not look ready to accelerate. It should fall from 2 % on average this year to 1.8% next year, in the wake of declining raw material prices. With no inflation on the horizon, central banks will maintain their very accommodative bias. Restricted by a persistent flat yield curve, the Fed will have trouble carrying out the three key interest rate increases it has planned. The ECB will remain particularly conservative and is unlikely to have an opportunity to take a position on a future increase in key rates.

The dollar is set to disappoint and maintain pressure on other countries. Japan, now benefiting from a more promising environment, is probably the country best placed to absorb the market’s wariness with regard to the US currency. Our exchange-rate scenario remains unchanged from our September projections and includes a substantial appreciation in the yen.

In the short run, we think exposure to risk is still a viable strategy, so long as it is focused on developed markets. But the current environment requires investors to be ready to change direction at a moment’s notice. For this reason, we have developed a fundamental allocation to complement our short-term, tactical recommendations.

European market rally: now or never

11 décembre 2017 par Véronique Riches-Flores

After several months of hesitancy during which European stockmarket performance was consistently disappointing, left behind by almost all other major global asset classes, could there be more encouragement for investors in last few weeks of the year? Recent developments mean that it is very tempting to predict a rally. That is especially the case since, unless the European markets show signs of waking up soon, it will become increasingly difficult for European investors to maintain hopes of a long-overdue rally.

The rising euro is taking more wind than expected out of eurozone inflation’s sails

4 décembre 2017 par Véronique Riches-Flores

Until now, economists have not been particularly worried by the euro’s rise since the beginning of the year, given that business trends and confidence in future growth had gained momentum. At less than $1.20 since mid-summer, the euro is trading well below certain past levels and also more in line with its purchasing power parity. Recent data indicate, however, that the single currency’s appreciation has had a significant impact on corporate margins and on import prices, resulting in a reduction of core inflation rates in the eurozone. This is relatively disconcerting at this stage in the business cycle and may be behind the sluggish stock markets of the past few months.

The dismantling of the UK economy is underway: an alarming prospect

25 novembre 2017 par Véronique Riches-Flores

The consequences of the 23 June 2016 referendum are becoming increasingly clear in the UK, and are painting a worrying picture of what might happen to the UK economy eventually if reason does not quickly start to prevail again in negotiations. Around 15 months after the UK voted to leave the EU, the parties have still not dealt with the preliminary matters that need to be resolved before discussions start on the trade agreement that is supposed to govern future UK/EU relations. Every day that passes without those matters being resolved increases the prospect of a hard Brexit, which likely to cause economic and financial chaos whose repercussions are difficult to predict on both sides of the Channel.

That outcome is clearly not the one that the Brexiteers sold to voters in the referendum campaign. As a result, unless the talks stir further anti-European resentment among the British people, they are likely to have growing doubts about whether the choice they made in 2016 was the right one. A new referendum could then happen, which could result in the UK deciding not to pursue the tricky matter of Brexit. We regard this scenario as fairly likely following Theresa May’s failure to win the snap election on 8 June 2017. In the meantime, and especially since we cannot count on that being the outcome of the saga, the threat posed to Europe by this looming divorce is likely to grow over the next few months.

Not much on offer to take advantage of a potential upturn in the European market

21 novembre 2017 par Véronique Riches-Flores

After taking a beating over the past few days, European equities should be well placed to take advantage of a rebound in world markets. Most specialists expect one, despite the instability of the past few days. In theory, all of the factors necessary for outperformance are in place: European stocks lag their worldwide counterparts, bond yields are still mostly negative on maturities up to five years – the lowest on the planet – and the economic outlook is favorable.

That said, with the German market relatively dear, bank stocks still suffering from low interest rates and many sectors well on their way to making up their lag, the range of attractive investments is limited. It’s not yet clear that Europe will fare better than the other regions of the world.

Not exactly party time in emerging markets. Does that matter?

14 novembre 2017 par Véronique Riches-Flores

While the USA is entering an extended phase of growth, Europe is enjoying a rapidly improving outlook and Japan is apparently recovering from two lost decades, emerging-market countries are struggling to keep up. Brazil and Russia have turned the corner after several years of recession, which means that average emerging-market growth rates are now higher than in the last two years. However, they are still disappointing. After a few encouraging months, the improvement in leading-activity indicators already seems to be fading. Exports of manufactured goods are benefiting only slightly from the upturn in global demand, while commodity exports are continuing to suffer from weak growth in export volumes and very varied price trends.

The situation seems not to be worrying observers or the markets, which are generally taking the view that the improving global outlook will eventually filter through to emerging-market countries. This is probably optimistic, given current trends. Indeed, there is a risk that disappointing performance in the developing world could drag down the global economy.

The Fifth Wave, or the Last Hurrah

6 novembre 2017 par Véronique Riches-Flores

According to Elliott wave aficionados, the fifth wave of the upward phase of a market cycle, itself composed of five wavelets, is characterized by unpredictability and unusual exuberance. During these periods, financial reflation and its powerful wealth effects overwhelm structural economic factors, and even most economists start having trouble differentiating rationality from recklessness. Those who don’t are considered party-poopers; they become less and less audible. The bond markets and central bankers also generally jump on the bandwagon. This often marks the beginning of the end of the party.