barometer€¦ · 1.8 1.6 1.4 1.2 2.6 2.4 2.2 2.0 1.8 1.6 1.4 global market overview brexit...
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g lo b a l a s s e t c la s s e s
We increase our exposure to global stocks to overweight as we expect policymakers to act decisively in the wake of the Brexit referendum.
e q u i ty r e g i o n s a n d s ty l e s
We remain overweight Europe and Japan on valuation grounds and upgrade UK stocks to overweight.
e q u i ty s e c to r s
We maintain a cyclical tilt via an overweight in materials and consumer discretionary stocks.
f i x e d i n c o m e
We upgrade US and EUR high yield bonds and go underweight the Japanese yen.
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Asset Management
Silver linings to Brexit clouds
BAROMETER2016July
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Energy
Industrials
Telecoms
EMD USD
Euro IG
Euro high yield
SterlingSwiss franc
Japanese yen
Emerging corporate
Gold
Materials
Consumer disc
Financials
IT
EMD local
US high yield
Euro
Utilities
Consumer staples
Health care
US
Euro
Swiss
UK
US IG
Japan
US
Euro
Swiss
Cash
Bonds
UK
Equities
Japan
Emerging markets
Pacific ex-Japan
ASSET CLASSES
EQUITIES
GLOBAL INDUSTRY SECTORS
GOVERNMENT BONDS
CREDIT
CURRENCIES VS. USD
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lobal equities swung wildly, bonds and gold rallied while sterling hit a 31-year low against the US dollar
after the UK unexpectedly voted to leave the European Union in a referendum. Stocks initially plunged in response to the ballot, but staged a recovery in the final week of the month amid expectations that policymakers would move to contain the fallout from the UK’s looming departure from the EU. Large-cap UK stocks represented in the MSCI UK index ended up 5 per cent in local currency terms while global stocks were down just 1 per cent. Europe-an shares underperformed their US and UK counter-parts, however, amid worries that the UK vote would dramatically alter Europe’s political landscape. Japa-nese equities fell as safe-haven flows sent the Japanese yen up by more than 7 per cent against the US dollar,
hurting the stocks of exporters. Emerging market stocks gained, meanwhile, as Brexit all but eliminated the prospect of a rate rise from the US Federal Reserve this year. Financials were the worst performers, with some stocks losing as much as 30 per cent in a day as the UK vote raised concerns about the health of European banks, already struggling to generate profits in an envi-ronment of low or negative interest rates. In fixed income, US, Japanese and European bench-mark government bond yields hit fresh record lows as investors expected central banks to keep monetary policy loose in the wake of Brexit. Having experienced its steepest daily decline in the post-1973 floating exchange rate era on June 27, ster-ling came under renewed pressure towards the very end of the month as Bank of England Governor Mark Carney suggested the central bank may cut interest rates over the summer. Emerging currencies and bonds rose across the board, lifted by expectations the Fed will turn increas-ingly dovish. Emerging currencies were up 2 per cent against the dollar on the month. Latin American curren-cies were the biggest outperformers, rising nearly 10 per cent, while emerging local and hard currency debt rose between 3 and 6 per cent. The Chinese renminbi fell 1 per cent against the dollar during the month in a sign that the People’s Bank of China is allowing market forces to play a bigger role in determining the exchange rate. Buying from risk-averse investors pushed gold by 9 per cent.
1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010 2013 2016
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Global market overview
Brexit unleashes turmoil in global markets
G
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Brexit takes sterling to 31-year low vs US dollarGBP/ USD exchange rate
Source: Thomson Reuters Datastream
2
Asset allocation
Upgrading equities, reassessing Brexit
1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016
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Val
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EQUITIES HAVE BEEN LESS
EXPENSIVE THAN TODAY ABOUT
70% OF THE TIME
BONDS HAVE BEEN LESS EXPENSIVE
THAN TODAY LESS THAN 1% OF THE
TIME
T he UK’s vote to leave the EU has sent shockwaves through financial mar-
kets. The political upheaval unleashed by the unexpected referendum result and the ensuing rise in market volatility will surely weigh on the global econo-my. But there are silver linings to the Brexit clouds – alert to the need to contain the fallout from UK’s landmark decision, policymakers are sure to act, relaxing fiscal austerity and maintaining a loose monetary policy. For instance, we now expect the Fed to leave interest rates on hold at least until next year, offering substantial sup-port to riskier asset classes. Moreover, Brexit may encourage governments in both Europe and elsewhere to push through economic stimulus to meas-ures to insure against shocks. This, coupled with the fact that valuations for
stocks are now at more attractive levels than they were a few weeks ago, has led us to upgrade equities to an overweight from neutral and to stay underweight bonds. At the same time, however, and as an insurance policy against any further bouts of volatility, we keep our over-weight stance in gold. According to our busi n e s s c yc l e in-dicators, growth is slowing somewhat in the US because of weaker investment and manufacturing activity, and slug-gish exports, which are suffering thanks to the strong US dollar. Labour market conditions are weakening too, with the economy adding only 3 8 ,0 0 0 jobs in May, the fewest since September 2010. However, the decline in non-farm pay-rolls growth does not point to a sharp slowdown, and recent consumption data shows more evidence of resilience. Following the Brexit vote, it now seems unlikely that the Fed will raise the cost of borrowing this year; the market is
now implying that the next rate rise will not materialise until 2018 . Easier-than- expected US monetary policy should help underpin growth, in our view. The euro zone economy, meanwhile, has been growing moderately, support- ed by European Central Bank stimulus measures, low oil prices and better la-bour market conditions. Also, the euro zone manufacturing PMI has risen to its highest level in six months. However, the fallout from Brexit is sure to weigh on business and consumer confidence as the year progresses. Political devel-opments will have the biggest influence on business sentiment in the near term. We are closely watching Italy’s plans to recapitalise its banks, which are sad-dled with EUR3 6 0 billion of bad loans –
Equities remain good value vs fixed incomeStocks and government bonds: valuation relative to 20 -year history, expressed as a percentile
Source: Pictet Asset Management
When valuation gap was this wide in the past (20 0 3 , 2012), eq-uity outperfomred bonds by double digits in the following 6 m in both cases.
Details on valuation metrics below: Equities Valuation, M S C I AC W I : average of price to book, 12m PE , PE on trend EP S , price to sales and equity risk premium. 20 years percentiles. Bonds, JPM GBI : Yields minus trend nominal GD P growth (Hodrick-Pres-cott filter). 20 years percentiles
3
6.2014 7.2014 12.2014 3.2015 6.2015 9.2015 12.2015 3.2016 6.2016
7
6
5
4
3
2
1
7
6
5
4
3
2
1
EM HARD CURRENCY VS US TREASURIESEURO INVESTMENT GRADE VS BUNDSEURO HIGH YIELD VS BUNDS
In percentage points
6.2012 12.2012 6.2013 12.2013 6.2014 12.2014 6.2015 12.2015 6.2016
110
100
90
80
70
110
100
90
80
70
60
EURGBPCHFJPY
6.2014 9.2014 12.2014 3.2015 6.2015 9.2015 12.2015 3.2016 6.2016
140
130
120
110
100
90
80
70
60
50
40
140
130
120
110
100
90
80
70
60
50
40
MSCI GLOBAL EQUITIESJPM GLOBAL BONDSGSCI INDEXUSD
6.2014 9.2014 12.2014 3.2015 6.2015 9.2015 12.2015 3.2016 6.2016
115
110
105
100
95
90
85
80
75
115
110
105
100
95
90
85
80
75
USEMUEMJP
Major asset classes
Equity sector rotation and currency performance
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M A R K E T M A R K E T M A R K E TD A T A D A T A D A T A
Performance: asset classes Bonds: asset class spreads
Global equity sector rotation: performance of cyclical vs defensive stocks
Performance: currencies vs USD
Source: Pictet Asset Management, Thomson Reuters Datastream / JPM and BoA Merrill Lynch
4
5.2014 9.2014 1.2015 5.2015 9.2015 1.2016 5.2016
3.0
2.5
2.0
1.5
1.0
0.5
%3m/3m 3.0
2.5
2.0
1.5
1.0
0.5
WORLD LEADING INDICATORAVERAGE (SINCE 99)
99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16
20
15
10
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% 20
15
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LEADING INDEX (Q/Q ANNUALISED)LEADING INDEX (Y/Y)WORLD GDP GROWTH (Y/Y)
5.2014 9.2014 1.2015 5.2015 9.2015 1.2016 5.2016
3.0
2.5
2.0
1.5
1.0
0.5
%3m/3m 3.0
2.5
2.0
1.5
1.0
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G10 LEADING INDICATORAVERAGE (SINCE 99)
5.2014 9.2014 1.2015 5.2015 9.2015 1.2016 5.2016
6.0
4.0
2.0
0.0
%3m/3m 6.0
4.0
2.0
0.0EM LEADING INDICATORAVERAGE (SINCE 99)
Risk bias indicators
Business cycle:World economic growth
remains moderate
G10 economic momentum eases slightly
Business cycleLiquidity
Valuation
TechnicalsPAM Strategy
RISK BIAS INDICATORS
M A R K E TM A R K E T M A R K E TM A R K E T D A T AD A T A D A T A
EM leading indicatorG10 leading indicator
World leading activity index and real G D P growth
World leading activity sequential growth
Source: Pictet Asset Management, Thomson Reuters Datastream / JPM and BoA Merrill Lynch
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MSCI REGIONS EPS GROWTH SALES GROWTH PE PB P/SALES DY
2016 2017 2016 2017 2016 2017 2016E 2016E 2016E
US 1% 14% 2% 6% 17.4 16.2 2.6 1.8 2.3%
EUROPE -1% 14% -1% 6% 14.6 13.6 1.5 1.1 4.1%
EMU 2% 13% 0% 4% 13.4 12.6 1.3 0.9 3.9%
SWITZERLAND -1% 11% 1% 4% 17.3 16.4 2.3 2.2 3.5%
UK -7% 17% -3% 9% 16.6 15.2 1.7 1.2 4.3%
JAPAN 15% 8% -1% 3% 12.4 12.1 1.0 0.7 2.6%
EM 6% 14% 3% 10% 12.4 11.6 1.3 0.8 2.8%
NJA 2% 12% 3% 9% 12.6 12.0 1.3 0.7 2.8%
GLOBAL 2% 13% 1% 6% 15.8 14.7 1.9 1.3 2.8%
MSCI SECTORS EPS GROWTH SALES GROWTH PE PB P/SALES DY
2016 2017 2016 2017 2016 2017 2016E 2016E 2016E
ENERGY -41% 97% -12% 20% 36.4 24.6 1.3 0.9 3.7%
MATERIALS 6% 17% -5% 5% 17.4 15.9 1.6 1.0 2.5%
INDUSTRIALS 12% 11% 2% 4% 15.6 14.9 2.2 0.9 2.6%
CONSUMER DISCRETIONARY 11% 12% 5% 5% 15.3 14.4 2.4 1.0 2.2%
CONSUMER STAPLES 5% 10% 3% 5% 21.4 20.3 4.0 1.3 2.6%
HEALTH CARE 7% 11% 8% 6% 16.5 15.7 3.4 1.8 2.1%
FINANCIALS -1% 10% 3% 5% 11.2 10.7 1.0 1.4 3.9%
IT 3% 13% 2% 5% 16.5 15.4 3.0 2.1 1.7%
TELECOMS 7% 9% 4% 2% 15.4 14.9 2.1 1.3 4.1%
UTILITIES -3% 4% -1% 2% 15.4 15.1 1.5 1.0 3.8%
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6.20
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Indexed
FEDECBBOEBOJSNB
6.20
14
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12.2
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3.20
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PICTET SENTIMENT INDEX (LHS)S&P 500 COMPOSITE – PRICE INDEX (RHS)+/– 1 STD
BUY SIGNAL
SELL SIGNAL
Valuation: Equity markets and sectors
Liquidity: Fed likely to stay on hold; stimulus provided
by other central banks
Sentiment indicator in neutral territory
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M A R K E T M A R K E T M A R K E TD A T A D A T AD A T A
Size of Central Banks’ balance sheets
Countries and sectors
Pictet sentiment cycle index
Source: Pictet Asset Management, Thomson Reuters Datastream / JPM and BoA Merrill Lynch
6
Our va luat ion signals show equities continue to be attractive relative to bonds. Our model indicates that Japa-nese shares are now approaching their cheapest levels on record, both in abso-lute terms and relative to other asset classes. European shares have also be-come much better value. Our technical readings suggest riskier asset classes are now in oversold terri- tory, raising the prospect of a bounce. Our indicators are also favourable for government bonds and credit, asset classes tend to do better than their risk-ier counterparts in the summer months. Seasonal factors also favour gold, even though the latest rally limits the scope for further gains in the precious metal.
a third of the euro zone’s total. If Italian Prime Minister Matteo Renzi manages to convince EU partners to be more flexi-ble on state aid for banks, this could give a strong positive signal. A gradual relaxation of fiscal deficit targest would also suggest that European governments are ready to do more do boost growth, building on the expansive monetary poli-cies set in motion by the ECB. Japan’s growth momentum remains weak. A strong Japanese yen is weigh-ing on exports and the manufacturing sector. While improving labour market conditions should support consumption, headline inflation is edging further into negative territory. Prime Minister Shinzo Abe postponed a proposed VAT hike until October 2019, while authorities are also likely to support the economy with fiscal and monetary easing. The govern-ment is expected to announce fiscal spending of up to JPY10 trillion and the Bank of Japan may purchase more ex-change-traded funds to extend the scope of its quantitative easing.
In China, economic activity is stabilis-ing, underpinned by Beijing’s recent fiscal and monetary stimulus measures. The housing market is accelerating fur-ther, especially in Tier 1 cities. Although the renminbi has depreciated in recent weeks and is near a five-year low against the dollar, capital outflows from China have so far remained muted. This is something we will be monitoring closely in the coming weeks. Elsewhere in emerging economies, China’s renewed stability and expecta-tions that the Fed will keep its monetary policy on hold should underpin growth in the near term. Some emerging econo-mies are also increasing spending to support their economies, with South Ko-rea planning a fiscal stimulus package of more than K RW20 trillion (USD17 bil-lion). In another positive development, India is looking to pass a key tax reform bill sooner than expected. Our l iqu i di t y conditions stand at a neutral level for a second consecutive month. Expectations that the Fed will remain on hold until at least the end of this year, and the likely expansion of the BOJ’s ETF buying programme, should lead to improved liquidity conditions in the coming months.
Asset allocation
7
Prospects encouraging for Europe, Japan and UK stocks
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
4.0
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HIGHER PROBABILITY OF SELL-OFF
HIGHER PROBABILITY OF RALLY
e retain our preference for Europe-an and Japanese stocks as the tur-
bulence triggered by the UK referendum has taken their valuations to levels that are at odds with fundamentals. Both markets stand to benefit from monetary and fiscal stimulus from the Japanese and European authorities. We have also upgraded UK stocks to overweight. The euro zone continues to see mod-est growth, led by household spending in the first quarter, and we expect the economic recovery to continue at a steady pace. Meanwhile, the ECB has said it stands ready to provide addi-tional liquidity to mitigate the impact of the vote and shore up the currency bloc. Equity risk premia in Europe are in line with their levels during the finan-cial crisis of 20 0 8 .* What is more, ana-lyst consensus corporate earnings forecasts for European firms have turned higher in recent weeks even though
Brexit might eventually slow that ad-vance. The technical picture is also positive for European stocks. As the chart shows, European stocks have suffered heavy outflows over the past few weeks, suggesting investor posi-tioning is now excessively bearish, in-creasing the scope for a rebound. In the UK, fears over what Brexit might hold in store for the UK economy has seen a number of domestically-exposed companies such as banks, homebuild-ers and real estate punished by inves-tors. On reflection, however, we believe the overall market is not as vulnerable to political turmoil as it would appear. The UK equity market is very diverse, composed of a mix of companies active in cyclical sectors such as energy and materials – which benefit from the recent recovery in commodity prices – and more defensive, multi-nationals that should reap significant gains from the weakening of sterling. In addition, we believe the government may look to enact some business-friendly reforms to reassure investors post-Brexit, includ-ing a potential cut in the corporate tax rate that would be an additional support for UK companies.
In Japan, the recent correction has pushed the equity market to levels that make it one of the cheapest asset classes on our global scorecard. This in part reflects the fact that Japanese Prime Minister Shinzo Abe’s economic revival programme is struggling to lift growth; declining valuations are also a response to a stronger yen, which could prove to be a drag on Japanese export-ers’ profits. However, the strength of the currency may force a policy response, one that will probably take the form of monetary and fiscal stimulus. According to our models, which takes into account bond yields and the value of the yen, Japa-nese equities exhibit a 10 per cent up-side. When it comes to sectors, we contin-ue to favour those most exposed to a recovery in economic growth. Consum-er discretionary companies should ben-efit from stronger spending in the US in particular. Telecoms look the most at-tractive of all sectors based on valua-tions, and within the sector, Japanese stocks look especially cheap. Financials stocks also look inexpen-sive but the Fed’s decision to hold off from raising rates – which will keep a lid on US banks’ profit margins – and Italy’s banking problems, prevent us from raising our exposure. That said, a comprehensive package to rescue ail-ing Italian banks would lead us to revisit the sector.
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Equity region and sector allocation
Heavy outflows from European stocks suggest rebound in storeInvestment flows into European E TFs, as % NAV, 12-week moving average
Source: Pictet Asset Management
* In our model, the equity risk premia is calculat-ed using European stocks’ 12-month for-ward P/E ratio, trend nominal GDP growth, the 10-year Bund yield and assumes a dividend payout ratio of 45 per cent.
8
ow global central banks choose to react to Brexit will have a major
bearing on world bond markets and currencies over the coming months, with investors particularly focused on the Fed. Until recently the markets had priced in two US rate increases for the second half of 2016. Following the referendum, investors started to discount no move until well into 2017 or even 2018 . At the same time, the Fed’s forward guidance is likely to become more dovish – its dot plot forecasts over the coming policy meetings are likely to show voting mem-bers trimming their long run expecta-tions for the Fed funds rate. Meanwhile, the BoJ, ECB and the BoE are all likely to maintain their accom-modative stances. Although the impact of any new measures in isolation would probably be modest, a coordinated pol-icy response has the potential to trigger a strong rally in higher-yielding bonds. For now, we expect the Fed’s dovish tilt to drive a further flattening of the yield curve as it feeds demand for long dated US government bonds. So we remain
overweight US Treasuries and are ex-tending the duration of our portfolio. We are less enthusiastic about other developed market sovereign debt. While UK gilts are also likely to draw sup-port from the rising prospect of further BoE easing and seasonal and technical factors also favour developed govern-ment debt over riskier assets, many sov-ereign securities are very expensive. With most of these bonds offering neg-ligible or negative yields and therefore limited scope for gains, we continue to keep an underweight stance on govern-ment debt, including Swiss bonds. A more dovish monetary policy, how-ever, is supportive of credit, particular-ly corporate high yield. We are lifting our exposure to US high yield bonds and are also shifting to an overweight on Eu-ropean high yield debt from neutral. On the other hand, European investment grade credit looks fully valued – inves-tors are already long the market in re-sponse to the ECB’s corporate bond pur-chase programme. The shift in the Fed’s thinking is like-ly to be positive for emerging market debt. This reinforces the attraction of a 4 0 0 basis point yield premium offered by emerging dollar debt over US Treas-uries.
While we remain overweight emerging market dollar bonds, for now we stick to our neutral stance on emerging mar-ket local currency debt, as developing world currencies could prove volatile in a shifting political landscape. Elsewhere, we have reduced our Jap-anese yen allocation to underweight from neutral. Our valuation model shows the Japanese currency is trading around one standard deviation above fair value, which suggests the currency could re-verse course. We remain neutral on other currencies. While the dollar has appreciated strongly during recent months and it might come under pressure from an easier Fed policy, it could just as easily see inflows from investors seeking de-fensive assets. The rising prospect of political up-heaval post-Brexit underpins our deci-sion to continue to overweight gold, de-spite its run higher this year.
1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016
DEVIATION FROM EQUILIBRIUM+/- 1 STANDARD DEVIATION
25
20
15
10
5
0
–5
–10
–15
25
20
15
10
5
0
–5
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JPY OVERVALUED
JPY UNDERVALUED
%
Overweight high yield, cutting Japanese yen to underweight
H
Fixed Income and currencies
Japenese yen overvaluedJPY trade-weighted exchange rate, deviation from equilibrium level, %
Source: Pictet Asset Management; equilibrium level calculated using a formula that incorporates Japan's consumer price inflation, productivity and holdings of net holdings of foreign assets
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Issued July 2016 © 2016 Pictet Each month, the PSU sets a
broad policy stance based on its analysis of:
b u s i n e s s c yc l e
Proprietary leading indicators, inflation
l i q u i d i ty
Monetary policy, credit/ money vari ables
va l uat i o n
Equity risk pre mium, yield gap, historical earnings multiples
t e c h n i c a l s
Pictet sentiment index (investors’ surveys, tactical indicators)
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Pictet Asset Management LimitedMoor House, 120 London Wall
London EC2Y 5ET
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