the opec agreement and - banca march€¦ · november losses, with gains for sovereign debt in...

Monthly Strategy Report January 2017

Equipo de Estrategia de Mercados de Banca March:

Alejandro Vidal, Unit Director, Market Strategies

Rose Marie Boudeguer, Service Director, Research Services

Pedro Sastre, Service Director, Market Strategies

Sebastián Larraza, Director, Discretionary Management Services

Paulo Gonçalves, Specialist Technician, Research Services

Miriam Ordinas Sanjuán, Specialist Technican, Market Strategies

Joseba Granero, Specialist Technican, Research Services

The OPEC agreement and the US rate hike garner attention in December

Monthly Strategy Report. January 2017

The OPEC agreement and the US rate hike garner attention in December

OPEC agreed to cut oil production...

December began with OPEC’s agreement to cut global crude production by 1.2 million barrels/day, effective from 1 January 2017; it is the first agreement in eight years. Non-member producing countries also joined the pact, with a total cut-off commitment of more than half a million barrels/day to be assumed mainly by Russia, and exempting Indonesia (a net oil importer), Libya, and Nigeria, the production of the latter two having been greatly reduced by internal armed conflicts. The agreement addresses the current oil supply surplus and aims to bolster its price.

…while the Fed announced interest rate hikes in the US.

In the United States, the Federal Reserve fulfilled market expectations and announced, unanimously, a 25 b.p. interest rate hike—the second in the last decade—situating rates between 0.50% and 0.75%. The Fed anticipates a gradual and accommodative process of rate hikes, with three increases expected in 2017, which would bring the federal funds rate to 1.25-1.5% by year-end. With regard to forecasts, the Fed slightly raised GDP growth prospects to 1.9% in 2016 and +2.1% in 2017, and cut the estimated unemployment rate to 4.7% in 2016 and 4.5% in 2017. Meanwhile, inflation is expected to reach 1.5% and 1.9%, respectively.

In Europe, Italy voted “no” to the Renzi reforms and moves forward with the financial sector bailout .

The Italian Prime Minister, Mateo Renzi, announced his resignation after Italy voted against the constitutional referendum that entailed ambitious structural reforms, including reducing the size and importance of the Senate and slimming the complex transalpine bureaucratic system. As a result of the referendum, general elections will be held this year.

But the bad news for Italy doesn’t end there: the new interim head of government, Paolo Gentiloni, announced a bailout of the struggling Italian banks, backed by a EUR 20 billion fund approved by Parliament that guarantees the savings of individuals. The restructuring plans were accelerated after the privately funded rescue of the country’s third largest bank, Banco Monte dei Paschi Siena, failed to gain the market confidence needed to secure the necessary funds. The request for aid is contingent upon the adoption of restructuring plans.

The outcome of the Austrian presidential election provided some relief.

The European Union breathed a sigh of relief after Austria elected the independent candidate, Alexander van der Bellen, in the re-run of the central European country’s presidential election, thus preventing the ascent of the ultra-right candidate who, nevertheless, vowed to run again in 2022 as a “promise to his voters”.

The ECB announced it will maintain stimulus measures…

ECB president, Mario Draghi, announced the extension of central bank’s debt-purchase program through December 2017, though it would reduce monthly acquisitions from the current EUR 80 billion to EUR 60 billion beginning in April. The ECB also modified the spectrum of eligible assets in its purchase program to include debt yielding less than the deposit rate (-0.40%) and debt with maturities of one year.

Meanwhile, Draghi reaffirmed the possibility of further extensions if necessary, with the goal of reaching target inflation levels and stimulating growth in the eurozone. The ECB issued an


upward revision of its 2017 growth and inflation expectations to 1.7% and 1.3%, respectively.

...in line with the policies of the central banks of the United Kingdom and Japan.

In the United Kingdom, interest rates remained unchanged at 0.25% despite rebounding inflation. The asset purchase facility and corporate bond purchase program also remained unchanged. Expecting to glean a clearer view of the Brexit’s impact on the economy, the Bank of England postponed the decision to modify its monetary policy.

In Japan, the central bank upgraded its future prospects for the economy to moderate “expansion.” At the same time, it reinforced its monetary policy on a qualitative and quantitative level by keeping the long-term rate curve around 0%; it will continue to expand its balance sheet by 80 trillion yen per year and the deposit rate will remain at -0.1%.

Macro-economic data confirms the good momentum of the US economy.

In general, the macroeconomic data published in the US repeated the positive trend of recent months. Most noteworthy were the upward revision of Q3’16 GDP (+3.5% annualised quarterly, the highest in the last three years), good figures in job creation and industrial orders, and the notable improvement in consumer confidence. On the downside, mass industrial production remained in the negative, demonstrating a slowdown in the manufacturing sector.

The eurozone repeated its rate of growth…

In the eurozone, the economy maintained a healthy GDP growth rate of +1.7% year-on-year in Q3. It is also worth noting the region’s declining unemployment figures (9.8% in October) and the rebound of the manufacturing PMI to 54.9 points (preliminary figures for December).

…most notably in Spain and Germany.

The German economy maintained the buoyancy of its external sector while consumer and business confidence indicators rebounded. Meanwhile, in Spain, the trade deficit continued to recede (at the lowest rate since publication began in 1997), retail sales registered significant growth, and the positive trend in the labour market persisted despite a slight increase in unemployment in November.

The data were also favourable in Asia…

In Asia, Japan saw good activity figures, exceptional machinery orders, improved business confidence, and moderation in the decline of exports. China, meanwhile, saw improvements in business confidence indicators (according to both the official index and Caixin), external sector data, and industrial production, while real estate prices eased after a battery of measures implemented by the government.

…while the monetary policy in Latin America’s two largest economies diverged.

In Latin America, the monetary policies of the continent’s two largest economies diverged: in Brazil, the minutes from the last meeting of the country’s central bank indicate further interest rate cuts, while in Mexico, the monetary authority raised rates again by 50 b.p., to 5.75% in an effort to curb the depreciation of the peso.

Acceptable evolution for bond markets...

The massive sell-off of government bonds in October and November did not continue into December. In Europe, the ECB’s statement regarding the extension of the stimulus program buttressed European bonds, as reflected in the lower required yield on German 10-year bonds (-7 b.p., 0.21%) and the Spanish equivalent (-17 b.p., 1.38%). In the US, with the rate hike already


taken into account, debt yields rebounded, though only marginally (10-yr. IRR +6 b.p., 2.44%). In this scenario, bond indices closed the month with gains in the eurozone (+0.66%) and minimal losses in the US (-0.1%).

…with a positive credit trend.

The narrowing of credit spreads and the ECB’s announcement that it will extend the stimulus program bolstered the credit market this month. Overall, investment-grade credit advanced 0.7%, while high-yield corporate debt climbed 1.8%. Finally, emerging debt recovered a portion of its November losses, with gains for sovereign debt in dollars (+1.2%) and in local currency (+1.1%).

A good December for equity markets, though annual performance was mixed overall.

The main global stock markets performed positively overall in December, driven by OPEC’s agreement to cut crude production and the confirmation of rate hikes in the US, symptomatic of the North American economy’s improving health. It is worth noting the good performance of European stocks: +7.8% €Stoxx50, +5.2% Footsie 100, and +7.6% for the IBEX in its best December in the last 20 years. Significant gains were also registered by the S&P 500 (+1.8%) and Japan’s Topix (+3.3%). Emerging stock markets, meanwhile, performed more discretely and the MSCI Emerging Market Index closed flat.

Stock markets ended the year with mixed results: an admirable performance from the Footsie (+14.4% and at a historic high thanks to the depreciation of the pound) and the S&P 500 (+9.5%), positive but more subdued performance of the €Stoxx 50 (+0.7%), and slightly negative results for the IBEX (-2%) and Topix (-1.8%). In emerging markets, the MSCI Index closed with gains of 8.6%, though the winning market was Brazil, +61%.

The dollar gained ground against the euro…

The rise in US rates and the uncertainty associated with Italy favoured the dollar’s advance against the euro, to close the month up 0.8% at 1.0517 EUR/USD. For its part, the pound sterling conceded some of the ground it gained against the euro in November to close the month at 0.854 EUR/GBP, down 0.7% against the single currency. The yen, meanwhile, depreciated -1.6% against the euro to 123 EUR/JPY.

…with uneven trends for oil and gold.

Crude’s upward trend was reinforced in December following the agreement of the main producing countries to limit production. The Brent reference rebounded 12.6% in December and 56% overall in 2016, to $56.82/barrel.

The US interest rate hike and the strong dollar weighed on gold prices, which fell -1.9% in December. However, high volatility throughout the year played in its favour and gold rose 8.7% overall in 2016.


Strategy for January 2017

ASSET ALLOCATION

Positive Neutral Negative

Variable income* Cash Fixed income*

ASSET ALLOCATION

Positive Neutral Negative

Varialbe incomeEE.UU.* Asia* Europa del Este

Europa Latinoamérica

Fixed income“High Yield” Emerging debt Government Bonds

Convertible Bonds Investiment Grade

*Changes proposed but not implemented yet

We begin a year in which we expect more dynamic global growth and rising inflation. Therefore, monetary policy will be less expansionary.

We begin a year in which more dynamic growth is anticipated, supported by expectations of fiscal stimulus and public investment in the United States, and the recovery of Russia and Brazil. The eurozone will continue to grow at a consistent pace and global inflation will rise. In this scenario, monetary policy will be less expansionary: the main central banks will curb monetary stimulus (the European Central Bank, among them) and, and raise rates in some cases (US Federal Reserve, primarily). In historical terms, however, interest rates will remain low and will continue to provide support for the recovery of activity.

This scenario is not devoid of risks, particularly of a political nature.

This positive outlook is not without risks, which could emerge from a heavy election calendar in Europe, the unknown course of measures to be implemented by the new US administration, the excess of private debt and capital flight in China, among other variables. In short, it will be a year of higher growth and higher risks. As such, the central banks will refrain from drastically tightening their monetary policies.

In the eurozone, returns on European monetary assets will remain low, though we recommend keeping cash in portfolios.

In the short and medium term, therefore, the returns on European monetary assets will remain under downward pressure given the continuity of the ECB’s bond buying, the elimination of the -0.4% floor, and the expansion of short-term bond purchases. Although the volume of purchases will decline beginning in April, it will still be sufficient to keep monetary rates at very low levels and therefore, though a slight recovery is expected over the course of the year, returns on monetary assets will remain meagre. Nevertheless, as a hedge against volatility, we recommend keeping the weight of these assets in portfolios.

Risk-free sovereign debt is unattractive given its exposure to contracting bond prices.

Investments in government bonds are vulnerable to interest rate hikes along the US curve, which will spill over to the European curves. In this regard, risk-free sovereign debt is unattractive given its exposure to contracting bond prices that cannot be offset by very low coupons. It is expected, however, that over the course of the year peripheral risk premia will gradually shrink, making peripheral debt somewhat less exposed than that of the eurozone’s core countries.


We recommend investing in bonds with short durations and pursuing returns by increasing credit risk: high yield, convertible bonds, bank debt.

Given the threat of rising interest rates, we recommend investing in bonds with short durations and pursuing returns by increasing credit risk. Credit is buoyed by accelerating growth, reasonable spreads, and default rates that will decline in the coming months. We recommend positions in high-yield debt, convertible bonds, and bank debt. In a context of rising base rates, the less-exposed private debt is that of the high-yield category with room to narrow spreads, unlike the investment-grade categories. Convertible debt will also benefit from the positive performance expected from equities, while bank debt is interesting because of improved growth and the steepening of the interest rate curve.

Emerging fixed income is also an attractive alternative as it offers extra profitability with the same risk.

Emerging fixed income is also an attractive alternative as it offers extra profitability with the same credit rating. In addition, the fundamentals of emerging nations will continue to improve and the weight of this asset type in institutional portfolios is still very low. We recommend the most conservative emerging bonds with short durations and no currency risk.

Growth acceleration is positive for equities: analysts agree corporate profits will rebound strongly in 2017.

Growth acceleration is positive for equities. A turnaround in corporate profits was confirmed in the third quarter and the analysts’ consensus is that they will rebound vigorously in 2017. In the United States, earnings per share among S&P 500 companies have been below trend this year and, despite their highs, will continue to soar due to increased sales and the tax rebate promised by Donald Trump. US profit growth is expected to be led by the financial, materials, energy, and technology sectors, though other more defensive industries, such as healthcare and basic consumer goods, continue to show greater revenue visibility; it will be important to select those companies capable of passing on the spike in commodity costs to the final consumer. Thanks to a larger slope on the curve, the financial sector will be able to improve its margins. In Europe, earnings per share have yet to reach pre-crisis levels so—given the good macroeconomic momentum of the eurozone at present—they have growth potential, especially driven by more cyclical sectors, like finance. As for risks, it is important to mention that stock markets are pricey and assets are exposed to political uncertainty.

As for currencies, the trend remains bullish for the dollar.

As for currencies, the trend remains bullish for the dollar. The Federal Reserve could raise rates three times in 2017 to a level near 1.5% and the market will continue to search for profitability: the dollar has become a market of high returns, eclipsing improved sentiment about the eurozone economy. Although the upward potential of the US currency is waning, the dollar could reach parity with the euro at some point this year.

The pound could resume its bearish trend from its current level.

The pound could resume its bearish trend from the current 0.85 EUR/GBP. The British currency is buoyed by expectations of higher fiscal spending and the lower likelihood of interest rate cuts in the short term. However, the prospect of a UK downturn and uncertainty over Brexit will mean further downward pressure for the pound in the coming months.


Oil prices are expected to rise slightly this year.

With regard to commodities, oil prices are expected to rise slightly in the medium term though a sharp increase is not anticipated because prices in excess of $65 will trigger a boost in US shale oil production. The outlook for 2017 is $60 average (Brent). With regard to gold, a strong appreciation is not expected but it will continue to serve as a safe haven asset in a year of economic and political risks. Metals should recover given increased infrastructure investments.

Equities are the most attractive asset but not devoid of risk; we recommend broad diversification.

In conclusion, we believe that, among assets, equities have the greatest potential for appreciation in 2017, but we continue to recommend broad diversification across all asset classes as protection given the uncertainty surrounding politics in general, and economic policy in particular.


Equity Indices IBEX35 (3 years)

Euribor Euribor 12 months (3 years)

EUR/USD (3 years)

10 years government yields

Currencies

Government Bonds

Corporate Bonds (1 year spread)

Commodities

Data: Bloomberg


Equity Indices performance (3 years)


Important Remark:

This contents of this document are merely illustrative and do not pretend, are not and cannot be considered under any circumstances as an investment recommendation towards the contracting of financial products.

This document has only been prepared to help the customer make an independent and individual decision but does not intend to replace any type of advice needed for the contracting of such products.

The terms and conditions described in this document are to be viewed as preliminary terms only, subject to discurssion and negotiation as well as to the agreement and final drafting of the terms affecting the transaction, which will appear in the contract or certificate to be issued.

Consequently, March Gestión de Fondos, S.G.I.I.C., S.A.U. and its customers are not bound by this conditions concerning the final documents to be approved. March Gestión de Fondos, S.G.I.I.C., S.A.U. does not offer any guarantee, expressly or implicitly, in relation with the information shown in this document.

All terms, conditions and prices contained in this document are merely informative and subject to modifications depending on the market circumstances, changes in laws, jurisprudence, administrative procedures or any other issue which may affect them. The customer should be aware that the products mentioned in this document may not be appropriate for his/her specific investment targets, financial situation or risk profile. For this reason the customer must make his/her own decisions by taking into account such circumstances and by obtaining specialized advice in tax, legal, financial, regulatoy, accounting issues or any other type of information required.

March Gestión de Fondos, S.G.I.I.C., S.A.U. does not assume any responsibility for any direct or indirect cost or loss which may result from the use of this document or its contents. No part of this document can be copied, photocopied or duplicated in any way or through any means, redistributed or quoted without a previous written authorization by March Gestión de Fondos, S.G.I.I.C., S.A.U.

Please note this document has been translated for your information only. In case of any errors or misinterpretations, the Spanish text will always prevail.

the opec agreement and - banca march€¦ · november losses, with gains for sovereign debt in...

Documents