BCGE group investment strategy

Transcription

BCGE group investment strategy
4th Quarter 2016
EDITORIAL
What a great summer!
FOCUS
Passing the baton of growth:
targeting productivity
Constantino Cancela
2
BCGE Group Chief Investment Officer
EDITORIAL
Meteorologists had said that summer 2016 would be much
hotter than average for the season. It even appears that September was the 3rd hottest month in Switzerland since records began, and that's 150 years! The markets also enjoyed
a good summer, even if it did begin with a great political
storm. Yet this came with relatively few financial impacts,
except for the weaker sterling, which declined considerably
in value.
The last few months have confirmed a number of events that
have been part of our scenario since the beginning of the
year. These include the stabilisation of the dollar, steady – yet
small-scale growth – and a pick-up in corporate earnings on
the major markets. This is great news for the productivity of
these corporates, as discussed further in this document in
the Focus section.
Despite the listlessness of this great summer, something happened on the other side of the Atlantic, which went virtually
unnoticed on the old continent. An open letter entitled Commonsense Principles of Corporate Governance was published
on 21 July 2016 on the website www.governanceprinciples.
org. Of course this isn't the first publication (nor will it be the
last) on a topic sparking worldwide debate. Yet this letter has
something special, given the high profile of its signatories.
As many as 13 "landmarks" of American capitalism came
together to awaken the media from their summer trance.
On the initiative – it would appear – of Warren Buffett and
Jamie Dimon (who are said to have met in secret, a story worthy
of a Hollywood film), Tim Armour, Mary Barra, Mary Erdoes,
Larry Finck, Jeff Immelt, Mark Machin, Lowell McAdam, Bill
McNabb, Ronald O’Hanley, Brian Rogers and Jeff Ubben signed
the Principles. We're not going to unpick this document here,
but we might say that its content reflects the title of the open
letter. Nor will we speculate on the actual or assumed motives
of these major 'Corporate America' managers.
However, since this quarterly edition of our strategy concentrates on the productivity of our preferential asset class,
which is given priority allocation, we will focus on one of
the Commonsense Principles put forward by the signatories.
Chapter IV "Public Reporting", paragraph b. reads: "A company should not feel obligated to provide earnings guidance
– and should determine whether providing earnings guidance
for the company’s shareholders does more harm than good.
If a company does provide earnings guidance, the company
should be realistic and avoid inflated projections. Making
short-term decisions to beat guidance (or any performance
benchmark) is likely to be value destructive in the long run".
In paragraph d. of the same chapter, the authors add:
"A company should take a long-term strategic view, as though
the company were private, and explain clearly to shareholders
how material decisions and actions are consistent with that
view".
"Only when the tide goes
out do you discover who's
been swimming naked."
Warren Buffet
BCGE Group Investment Strategy
4th Quarter 2016
CONTENT
As an investor focusing on the long term, making decisions
based on the companies' fundamentals and not on their stock
market price, we can only applaud this direction. It will likely
take many more to end the tyranny of quarterly publications,
which do nothing but add unnecessary volatility to an asset
class that – by nature – is already volatile, since it reflects the
real economy.
EDITORIAL
MACRO SUMMARY
6
The problem is, therefore, that the transparency given to
short-term investors (not to say speculators) usually comes at
the expense of companies' real shareholders – those who buy
a company and not a share! It is an equity investment segment that completely escapes this tyranny and its disturbance
to equity prices – that's private equity for you! It's a great way
to take part in the long-term value created by entrepreneurs,
while staying well away from the worry of the stock market.
This is especially true when investing in the mid-cap segment
and in growth or buy-out growth companies, and when diversifying broadly worldwide. The annualised returns achieved by
managers of these types of companies since 2000 were well
above the equity market, with much less volatility as shown in
the graph. The high yields more than offset the lack of liquidity. Yet this should not frighten off true long-term investors.
MARKET SUMMARY & STRATEGIC DECISIONS
7
ECONOMIC & FINANCIAL OUTLOOK
8
Investment performance in companies
500
2
FOCUS4
Passing the baton of growth: targeting productivity
SWITZERLAND
Macro9
Interest & exchange rates10
Stock markets11
EUROZONE
Macro
Interest & exchange rates
Stock markets
12
13
14
UNITED STATES
Macro
Interest & exchange rates
Stock markets
15
16
17
EMERGING REGION
Macro
Emerging Debt
Stock markets
18
19
20
400
COMMODITIES21
300
200
100
0
00
01
02
03
04
05
06
07
08
09
10
11
12
13
14
15
MSCI World Equity Index (returns with reinvestment of dividends, in USD) total return, based = 100
PrEQln Private Equity Index - Buyout/any quartiles (net returns, in USD) total return, based = 100
PrEQln Private Equity Index - All Strategies/any quartiles (net returns, in USD) total return, based = 100
With favourable equity market conditions, our strategy for the
coming months is to continue prioritising this asset class over
bonds, which have an underweight position in our portfolios.
We are currently keeping geographical exposure unchanged.
4th Quarter 2016
3
Valérie Lemaigre
4
Chief Economist
FOCUS
Passing the baton of growth:
targeting productivity
For several years now, central banks have been in a frantic
relay race against deflation. The passing of the baton between
central bankers in various regions has helped to curb those
risks caused by a range of factors, including debt reduction,
ageing demographics, or even excess commodity capacity.
Prices seem to have stabilised, yet there really is not too much
to be pleased about. Non-conventional measures, and their
unpredictable effects, are currently causing volatility and
uncertainty on the bond markets and on bank's profitability
prospects. Ensuring stability in the financial system is, therefore, the second main priority to be addressed by central bankers, and the recent events relating to Deutsche Bank call them
to order.
This summer, at the Jackson Hole meeting of central bankers
and the G20 Summit, monetary authorities from different
regions came together with one voice to pass the baton of
growth to political authorities. Since finance ministers were
instrumental in curbing deflation – a situation characterised
by falling prices and slowing growth – the dissatisfaction over
the lacklustre pace of growth in developed countries in recent
years should not be directed to them.
Wealth creation through economic growth depends on the development of the population and its ability to produce quantity
4th Quarter 2016
and quality (productivity). Bearing in mind that the population
is ageing in the developed countries – or even declining in
some regions – the acceleration of growth requires a boost in
job productivity. Addressing this issue is becoming the ultimate
priority for economic growth, which is propped up artificially
through injections of liquidity, which must now be unplugged
in order to give growth a new sense of impetus and autonomy.
The industrial revolution helped to boost the productivity of
the manufacturing sector and the information technology revolution has fuelled that of the services sector. The changes
brought about by the recent digital revolution remain open for
discussion, not so much in terms of the distribution channels
between companies and customers, but rather their potential
for further wealth creation.
Productivity is ideally brought about by the efficiency of the
combination of workers and machines (labour and capital). In
order to make the most of this marriage, the performance of
the tool is essential, but in-depth knowledge of how it works
is also required to boost its potential. "Productivity is working
smarter rather than working harder". There are therefore two
angles of attack: investment in technology and innovation,
alongside staff training and expertise.
FOCUS
To address this aggregate problem, the economic policies pursued by governments are key to bringing about the much-needed boost and cover a broad range of areas: excellent education, teaching and training, university investment to promote
research and development at company level, communications
infrastructure and mobility of economic actors and, lastly,
attractive social and fiscal framework conditions. However,
there is another aspect muscling in on the debate: the issue
of wealth disparity compounded by technological advancements, financial expansion and the great recession, which are
hampering productivity – a whole host of issues to be covered
by budgetary, social and fiscal policy. Yet the effectiveness of
these policies ultimately depends on corporations, which play
a central role in this issue. For several years now, their sluggish
investments have limited the prospects of accelerating the economy. Nonetheless, great efforts have been made to facilitate
access to financing for corporations and reduce segmentation
in line with their size. It is clear that large corporates have
more autonomy to combine investment in innovation, research
and development and staff training. Yet small businesses also
have their own role to play, particularly in governance strategies to fuel productivity beyond R&D, i.e. prioritising financing
through capital and debt reduction or even earlier acquisitions
and mergers.
to absorb shocks. Moreover, the acceleration of wages in the
United States very much needs to be offset by a growth in productivity so that corporations can go beyond these poor longterm return on investment prospects. Here, Swiss corporates
come under the spotlight which, despite tentative investments
in recent years, have advanced in the value chain by investing
massively in research and development and technology (+ 25%
since 2008), increasing the proportion of these investments
from 36 to 44% in their overall capital spending. Switzerland
also has increasingly qualified staff and is driving the creation
of companies (start-ups), giving it one of the most dynamic positions, especially in terms of number/inhabitants. These strategies have enabled corporations to overcome various nominal
shocks without too much damage.
The ability to create added value through productivity is therefore the main priority for growth. Clear aggregated policies
must promote a conducive environment while using the individual strategies of corporations that gear themselves towards
the future by investing in the present. The relay race and passing of the baton require close collaboration between authorities and entrepreneurs for growth to get back to record results.
Our ongoing aim to select the best companies brings us to
look at the individual potential of companies to create longterm added value. Earnings growth has been declining for
several quarters in most areas, suffering not only from unfavourable economic conditions but also from a lack of buffers
The lack of economic growth could be boosted by an acceleration in productivity of factors. Investments in innovation, technology and research and development must be favored.
Comparison of business investment
Productivity growth
Annual percentage change
15
6
Growth
10
4
5
2
0
0
-5
-2
-10
Contraction
-15
-20
04
United States
06
08
Germany
10
Euro Zone
12
14
Switzerland
-4
16
-6
90
92
94
United States
96
98
00
Germany
02
04
06
08
10
12
14
Switzerland
4th Quarter 2016
16
5
MACRO SUMMARY
Recent trend
GDP growth
While remaining modest, economic growth by and
large stayed well oriented in the second quarter.
The stabilisation of the dollar has led to the return to
a positive export cycle – both in the United States and
Europe – as well as a stabilisation of commodity prices.
This upturn can also be seen in inflation in all
developed countries.
6
5
Growth
4
3
2
1
0
-1
-2
-3
Without questioning the normalisation of its policy,
the Fed has not increased its funds rate, whilst
Quantitave Easing programmes continue in Europe
(reinforced by the Bank of England) and in Japan.
Although exports in developed countries appear
promising, the upturn coming from emerging
countries must still be reinforced, justifying the
continuation of an accommodating monetary policy.
Recession
-4
-5
00
01
02
03
04
05
United States
Eurozone
06
07
08
09
10
11
12
13
14
15
16
17
09
10
11
12
13
14
15
16
17
Switzerland
BCGE forecast
Consumer price inflation
6
Inflation
4
Outlook for 2016-17
Growth is expected to continue at a moderate pace
without accelerating. In anticipation of a pick-up in
corporate investment, household consumption will
continue to fuel growth.
2
0
-2
An effort is also being made to strengthen growth
by prioritising policies geared towards infrastructure
spending and productivity.
Thanks to the fall in unemployment and rebound in
commodity prices, inflation is set to continue picking
up in Europe and the United States. While prices
stability may justify an accommodating bias,
the stability of the financial system, banks and bond
markets will require great vigilance by central banks.
Deflation
00
01
02
03
04
05
06
United States
Eurozone
Switzerland
BCGE forecast
BCGE US
2.5
US
2.0
BCGE EZ
1.5
JP
1.0
0.5
IT FR
DE
UK
SP
EZ
BCGE CH
CH
0.0
0.5
1.0
GDP growth (annual variation in %)
4th Quarter 2016
08
3.0
0.0
07
Forecasts 2017
Inflation (annual variation in %)
6
1.5
2.0
2.5
3.0
3.5
4.0
MARKET SUMMARY & STRATEGIC DECISIONS
Asset allocation
The ongoing economic growth and attractiveness of asset classes
continue to enhance the case for equities.
The pick-up in inflation and extreme valuation of bonds are still
prompting caution towards assets exposed to greater volatility.
Equities
Bonds
Currencies
++
+
--
Maintain the moderate overweight position of equities,
maintain the underweight position of bonds,
maintain the overweight position of liquidity.
Equities
Having contracted recently, the earnings of major corporates are
showing signs of strengthening.
The valuation of developed countries is high, but does not call for any
imminent adjustment.
Banks are continuing to suffer from low rates and allocation is
benefiting industrial cyclical sectors.
CH
in%
100
EUROPE
US
EM
75
50
41 41
37 37
25
12 12
10 10
0
Maintain the strong overweight position of the Swiss market,
maintain a favourable bias to U.S. equities,
maintain the weighting in Emerging markets whose valuation remains attractive.
Bonds
5 years
Short term
Shorter duration bonds protect against the rise in volatility.
Normalisation and inflation in the U.S. could put pressure
on bond yields.
CHF
EUR
USD
Long term
CHF
EUR
USD
++
+
--
Avoid investments with negative yields,
avoid duration risk by prioritising shorter-duration securities,
prioritise investment-grade date that still have
yield potential.
Currencies
The approach of limiting monetary policy suggests greater
exchange rate stability.
External political events are likely to cause volatility in the foreign
exchange market.
More stable currencies would suggest that there is little interest
in hedging the exchange rate risk.
CHF
EUR
USD
JPY
++
+
--
Priority towards base money.
Previous
Recent
4th Quarter 2016
7
8
ECONOMIC & FINANCIAL OUTLOOK
ECONOMY
GDP %
Inflation %
Recent
2015
Last data
2016
2017
Switzerland
0.8
2.5
1.5
1.4
Eurozone
1.9
1.2
1.5
1.4
United States
2.6
1.1
1.4
1.9
Emerging zone
4.0
n/a
4.1
4.6
Switzerland
-1.1
-0.2
-0.3
0.4
Eurozone
0.0
0.2
0.4
1.4
United States
0.1
0.9
1.3
2.5
Emerging zone
5.5
n/a
4.6
4.4
MARKETS
Target rate in %
10 y Interest rate %
Currencies
Equities
Commodities
Forecasts
3 months
12 months
0.0
-0.75
-0.75
-0.3
-0.2
-0.40
-0.40
0.1
0.4
0.2
0.80
1.00
0.0
-0.4
-0.4
-0.3
-0.4
-0.1
Eurozone
0.6
0.1
0.0
-0.7
-0.1
0.1
United States
2.3
0.1
1.7
-0.6
1.7
1.9
USD/CHF
1.00
0.8
0.97
-3.0
0.98
0.98
EUR/CHF
1.09
-9.6
1.09
0.5
1.08
1.08
EUR/USD
1.09
-10.3
1.12
3.1
1.10
1.10
SMI
8818
-1.8
8206
-6.9
8500
8670
Stoxx 600
366
6.8
342
-6.4
360
370
S&P 500
2044
-0.7
2159
5.6
2260
2440
MSCI EM
794
-17.0
889
12.0
880
970
Crude oil Brent
36
-36.1
49
36.2
45
55
1062
-10.5
1325
24.7
1350
1350
31.12.2015
12.09.2016
Value
2014 %
Switzerland
-0.8
-0.7
-0.7
Eurozone
-0.1
-0.2
United States
0.2
Switzerland
Gold
Text and values as at 12.09.2016
4th Quarter 2016
Value
YTD %
SWITZERLAND
Macro
The acceleration in activity has suffered from
a true engine of growth.
Up 0.6% in the second quarter, GDP showed a higher growth
rate than that recorded last winter. However, by analysing the
sources of growth, the weaknesses of the past quarter are
revealed. Swiss households have not increased their consumer
spending, nor have corporations, whose investment has declined over the period. The growth figure in this regard – positive
as a whole – is the result of a spurt of government spending,
gold exports and lesser stock reduction. Whilst leading indicators have declined recently, there is no question that economic
growth is heading in the right direction and should therefore
continue at a moderate pace. Corporate investment – which has
not been forthcoming – has the greatest potential for acceleration. At sector level, business surveys still reveal substantial differences. While the tourism, watchmaking and finance sectors
will continue to face a challenging environment, other industries
have better prospects. This is already true of chemistry, which
picked up particularly thanks to exports.
Switzerland: contribution to GDP growth
Quarterly variation in %
4
3
2
1
0
-1
-2
-3
-4
09
10
11
Net exports without gold
Private consumption
12
13
Business investment
Change in inventories
14
15
Switzerland: exports and exchange rates
Annual percentage change, Inverted scale
100
120
80
110
60
Inflation is no longer far from zero
Inflation has continued to rise over the summer. Reaching
-0.1% year-over-year, the main inflation index is still suffering
from a negative base effect due to oil prices. Conversely, the
effect is no longer negative for exchange rates. Following the
franc's major rise after abolishing the floor rate, it has finally
stabilised against the euro. The oil price, which has been rising
since the beginning of the year, should soon no longer influence
the main consumer price index. Average inflation should remain
negative this year, but is set to turn positive again according
to our forecast for 2017. The Swiss National Bank has not announced any new monetary policy measures in this regard. Still,
the authorities are remaining vigilant to counteract any upward
pressure on the franc, which would lead to new interventions
on foreign exchange markets. Nonetheless, the intervention rate
range remains unchanged, as reflected in our projections for the
coming months.
16
Government consumption
GDP growth
100
40
90
20
0
80
-20
70
-40
07
08
09
10
11
12
Composite indicator KOF
Banks
13
14
15
16
Restaurant and hotel business
Insurances
Macroeconomic data : Switzerland
2016
2017
GDP %
1.5
1.4
Inflation %
-0.3
0.4
Unemployment rate %
3.4
3.6
Target rate %
-0.75
-0.75
10 year interest rate %
-0.30
0.10
USD/CHF
0.98
0.98
EUR/CHF
1.10
1.12
Index
8500
8750
EPS
-5%
3%
PER
16.6
16.6
SMI
4th Quarter 2016
60
9
10
SWITZERLAND
Interest rate
Currency
Switzerland : exchange rate
Switzerland : interest rate
In %
4
1.05
1.25
3
1.20
2
1.15
1
1.10
0
1.05
1.00
0.95
0.90
0.85
1.00
-1
08
09
10
11
12
13
14
15
16
10 year Confederation bond
3 month Libor CHF
11
12
13
14
15
16
EUR/CHF
USD/CHF (R.H. Scale)
Swiss rates affected by international
movements
Value of the franc: fluctuations with no set
trend
Without showing any significant volatility, the 3-month Libor
rate has progressed upwards over the summer. Starting the
quarter with the average rate set by the Swiss National Bank,
the Libor exceeded this level in the first few days of August. As
such, Switzerland coped well with the downward pressures just
before the summer caused by the United Kingdom's decision to
leave the European Union. More recently, the trends reflect the
improved market expectations towards the policy of normalising
interest rates in the United States. Furthermore, Switzerland's
2-year bond yield came under pressure during the period. By
approximately 10 basis points, the rise also followed on from
international rate movements. Assuming the status quo for monetary policy, we project a sideways trend for short-term interest
rates over the coming months.
After the turbulence of the forex market – caused by concerns
at the end of the spring – the Swiss franc remained relatively
stable over the summer. The value of the franc kept pace with the
dollar, but weakened slightly against the euro. This trend meant
the Swiss currency was unable to regain the levels seen prior to
the British referendum, despite the widespread concern in the
minds of investors over the timing of the second Fed rate hike.
While the normalisation of the Fed's monetary policy is justified
in our view, this should not cause large fluctuations in the dollar
against the franc. Against the euro, we also predict a relatively
stable trend given that the ECB is not expected to announce any
major new changes to its policy. Furthermore, the SNB is poised
to counteract any excessive upward pressures, as shown by the
new increase in the balance sheet of the central bank over the
summer, in connection with the disruption caused by BREXIT.
The new direction of the Bank of England's monetary policy has,
however, had a negative impact on the value of the pound sterling. Nonetheless, recent statistics on the British economy have
dispelled fears of a collapse of UK growth, thereby curbing the
rise of the franc seen in early summer. All in all, the value of
the franc has ultimately changed little compared to the first few
days of the past quarter. Emerging currencies – whose prices have
been shunted around due to the volatility of oil prices – have also
failed to gain ground against the value of the franc. Once again, a
sideways trend has emerged, confirming our scenario with limited
fluctuations.
Pressures on longer maturities
Long-term interest rates have also been affected by international
trends. Coming close to zero, Switzerland's 10-year borrowing
yield rate came under pressure during the past quarter. Reflecting inflation, it remains negative at close to -0.4%. Long-term
rates should continue to progress within fluctuation margins,
yet not without some degree of volatility. Given the extreme
rates seen recently, longer maturities are particularly vulnerable
to sharp price fluctuations. The volatility in the bond markets will
be kept in the spotlight by central banks, which have become
the dominant players in the government bond market. By exerting pressure on the yield curve and profitability of banks, central banks cannot but aim to restore financial stability.
4th Quarter 2016
SWITZERLAND
Stock markets
Still a well-positioned market
As the concerns surrounding Brexit eased off in late June, Swiss
stock prices retook their road to growth. Given this relative optimism, the market overall has developed positively, albeit with a
slight advantage for small and mid caps. These companies achieved record highs in early September. By sector, technological
and industrial values rallied the most.
No expansion of multiples
In terms of valuations, essentially nothing has changed in the
last 3 months; Swiss companies are still expensive and above
their historical average. Interestingly, while large caps have seen
a small expansion of the P/E ratio, the same cannot be said of
smaller companies, whose multiples have contracted slightly. The excellent half-year results of most of these companies
meant that their estimated earnings increased further than their
stock price.
Earnings on the rise
By and large, Swiss companies seem more optimistic about their
earnings prospects than at the start of the year. This is reinforced
by the analysts' earnings forecasts for 2017 (+10.4%). Being still
rather well positioned overall, this allows us to maintain our overweight position on Swiss equities. Focus must stay, however,
on leading indicator trends, which have recently undergone a
slight decline, and on corporations' willingness to invest, which
remains fragile.
Switzerland : stock market indices
Rebased on 100 = -5 years
180
160
140
120
100
80
12
13
14
15
16
SPI EXTRA
SMI
Switzerland : stock market fundamental indicators
Price / earnings ratio
18
15
16
10
14
5
12
0
10
11
12
13
14
15
16
P/E SMI
Earnings growth forecast (R.H. Scale)
Summary
Growth is continuing to pick up without accelerating.
Inflation has continued to rise and is set to turn positive again in 2017.
In the event of any pressure on the franc, the SNB will continue to intervene on forex markets rather than acting
on interest rates.
The lack of bond yields and rising inflation make the case for a reduced allocation and for a selection geared
towards equities.
The upturn of corporate earnings is set to create a support for Swiss equities.
Selecting companies that invest in the long term will continue to be a strong source of performance.
4th Quarter 2016
-5
11
12
EUROZONE
Macro
Exports have been driving growth
Over the first two quarters of this year, economic growth in
the eurozone has halved. For the most part, the 0.3% rise in
GDP over this spring is the result of exports. Domestic consumer spending made only very little advances, be it household,
government or business spending. The exceptional monetary
conditions implemented by the ECB were not enough to accelerate capital expenditure. Overall, the outlook remains well positioned in terms of production levels. Based on our scenario, the
23 June in the United Kingdom has not given rise to any shocks
to consumer or business confidence in the eurozone, and leading business-cycle indicators have remained resilient. They do,
however, show no signs of accelerating and, according to our
forecasts, growth is expected to remain moderate.
Quantitative easing continues
Since the start of summer, inflation has remained in marginally
positive territory. Yet at less than 0.2%, monetary authorities are
still a long way off reaching their target. While commodity prices
are set to contribute to a rise in inflation in the near future, the
stability of exchange rates is no longer expected to boost the key
consumer price index. Even though unemployment is continuing
to pick up, its current level at over 10% does not point to any
wage pressures. In light of the corporate debt buybacks, the extraordinary monetary policy of the ECB in Frankfurt accelerated
over the summer. To date, the monetary authorities already hold
more than 25 billion private bonds. In this context, the Central Bank will allow itself more time to assess the effects of this
policy on economic fundamentals. Rate cuts are still possible in
order to boost inflation, but with less and less flexibility, mainly
to maintain the stability of the financial system. Moreover, any
extensions of securities purchase programmes are coming up
against technical difficulties due to negative rates.
Eurozone : world and European exports
40
30
20
10
0
-10
-20
-30
-40
06
07
4th Quarter 2016
09
10
11
12
13
14
15
16
Zone euro : business investment
Balance of responses
20
20
10
10
0
0
-10
-10
-20
-20
-30
-30
-40
06
07
08
09
10
11
12
13
14
15
16
Investments
Business surveys (55% services and 45% manufacturing)
Macroeconomic data : Eurozone
2016
2017
GDP %
1.5
1.4
Inflation %
0.4
1.4
Unemployment rate %
9.7
9.0
Target rate %
-0.40
-0.40
0.00
0.30
EUR/USD
1.10
1.15
Index
360
375
EPS
-8%
5%
PER
15.9
15.7
Stoxx 600
08
European exports
World exports
-40
EUROZONE
Currency
Interest rate
Eurozone : interest rate
Eurozone : exchange rate
In %
2.5
1.6
1.00
2.0
1.5
0.95
1.5
1.4
1.0
1.3
0.5
1.2
0.0
1.1
0.90
0.85
0.80
0.75
0.70
1.0
-0.5
11
12
13
14
15
16
10 year Bund
3 month Euribor
0.65
11
12
13
14
15
16
EUR/USD
EUR/GBP (R.H. Scale)
Short-term rates: limited potential for trending
lower
Slight oscillations, despite political
disturbances.
Becoming impatient to see a return to inflation, certain market
players are anticipating further easing by the authorities in Frankfurt. Despite an only very marginal movement, the 3-month Libor
rate fell deeper into negative territory over the summer. Our scenario does not forecast any further fall in the key ECB interest
rate. Although the German government 2-year borrowing yield
is lower than the 3-month rate, its level has not declined over
the past quarter. Given that the ECB's mandate is based on price
stability, monetary policy cannot only respond to dissatisfaction
over the pace of growth. Moreover, the cost borne by commercial
banks for the negative interest rate policy, has already been estimated at more than EUR 500 million. Without a doubt, financial
stability will be the Central Bank's policy.
Despite the extremely accommodating policy of the ECB, the value of the single currency generally appreciated over the summer.
Particularly against the dollar, the euro was prone to volatility,
reflecting market fluctuations in connection with the likelihood
of a Fed rate hike.
First corporate bonds issued at negative rates
While long-term rates have shown some recent signs of pressure,
the German 10-year bond yield rate has, nonetheless, stayed in
negative territory. This slight upward movement reflects the restless curves seen across international markets. Indeed, growth in
the eurozone slowed and inflation is increasing only very slowly.
Inflation expectations also declined over the summer. The potential rises are limited by the policies of central banks which are
continuing to dry up the market. Fuelled by a new dip in yields,
there has been a recent emergence of bonds issued by non-financial corporations at negative rates. As such, there is unlikely to be
a clear upward trend of long-term interest rates which, at most,
will face large fluctuations.
This lack of trend may continue over the coming months. Still, the
divergence in monetary policy could have an influence, but the
rate differences are not significant enough to produce a major
advantage. On both sides of the Atlantic, growth is expected to
continue without any major accelerations, a scenario for which
there is no clear foreign exchange trend. Moreover, while financial conditions tend to favour the dollar, the eurozone trade surplus, which has reached a new record, is dampening the dollar's
potential appreciation. The statements heard at the G20 summits
also reflect a desire to limit attempts to create a competitive advantage by manipulating exchange rates.
In Europe, the single currency is up 1-2% against the Swedish
or Danish crown. Yet the market still has no clear trend. On the
contrary, more substantial movements were the result of external shocks in connection with political shocks affecting the British sterling and Turkish lira. Against these currencies, the euro
strengthened much more.
4th Quarter 2016
13
14
EUROZONE
Stock markets
Little volatility over the summer
The summer period was excellent for risky assets. After a major adjustment due to Brexit, European equities – supported
by accommodating policies by central banks in Europe – have
seen positive statistics and a pick-up in commodities prices. This
upturn was fuelled by small volumes, low volatility and a lack
of bad news. Cyclical sectors have outperformed, thanks to a
renewed risk appetite. In contrast, higher-dividend stocks were
affected by the prospects of a U.S. rate hike.
European equities are still attractive in terms of risk-free assets.
They do, however, have wide disparities, including between
cyclical and defensive stocks. While management styles cannot currently be distinguished (growth vs. value, small vs. large
caps), the individual selection of securities is particularly essential
for managing opportunities and risks.
Pick-up in earnings in 2017
After Brexit, analysts have continued to revise earnings estimates downwards, while companies in continental Europe remain rather unaffected for the time being, and the British are
taking advantage of the weaker pound sterling. The results of
the second quarter have even surprised the analysts.
Aside from the uncertainty of the European political agenda,
which has been a source of market volatility, the prospects of an
upturn should materialise in 2017 through a pick-up in earnings
underpinned by activity and cost control.
Eurozone : stock market indices
200
180
160
140
120
100
80
11
12
13
14
15
16
Stoxx 600
MSCI Small cap Europe
Eurozone : stock market fundamental indicators
Price/earnings ratio
18
14
16
12
14
10
12
8
10
6
8
4
11
12
13
14
15
16
P/E ratio
Expected earnings growth (R.H. Scale)
Summary
Economic growth is set to maintain its steady pace without accelerating.
While still very close to zero, inflation will pick up noticeably in 2017.
While the ECB's securities purchase programmes will follow its course, intervention rates are not expected to come
up against any major new cuts, and the euro will move sideways.
Due to excessive valuations, regional allocation is prioritising equities over bonds.
Pressures from quantitative easing programmes make it more difficult to seek returns and fuel price volatility.
The gradual pick-up in earnings, apart from bank profits, should give rise to some appreciation of resilient
corporations investing in productivity.
4th Quarter 2016
UNITED STATES
Macro
Growth: consumption holds steady
After the weak expansion of activity seen at the beginning of
the year, U.S. growth slightly accelerated over the spring. However, the annualised rate of 1.1% remains low in relation to the
historical growth potential. Moreover, the analysis of spending
in the second quarter reveals that the acceleration of activity
was only thanks to domestic household consumption. Foreign
trade contributed marginally to the increase in GDP. Corporate
investment contracted once again, which is continuing to be a
cause of concern, especially as it was accompanied by a decline
in productivity.
While a pick-up in investment is overdue, employment and real
estate markets remain strong. This trend is fuelled by the expansion of the salary base in a labour market which is at full employment. The pace of growth will remain moderate as shown by
the results of the business surveys which have shown a recent
downturn, particularly as a result of negative seasonal effects.
The normalisation of monetary policy goes
unquestioned
At 1.1%, according to the last survey, inflation has continued
to rise. Over the quarter, the key consumer price index has been
volatile after the fluctuations in oil prices. The trend we anticipate in this regard will support the movement of higher inflation. Moreover, the U.S. economy is now at full employment,
which is a positive development for wage increases. Our scenario forecasts an acceleration in inflation to over 2% in 2017. In
this regard, markets were driven over the summer by the Fed's
procrastinations regarding the second interest rate hike. At the
end of its meeting in September, the Fed decided to postpone
its next rate hike – while still promising it – "to keep everyone
happy."
United States : business survey
Balance of responces
65
60
55
50
45
40
35
30
06
07
08
09
10
11
12
13
14
15
16
13
14
15
16
ISM services
ISM manufacturing
United States : exports and global cycle
40
30
20
10
0
-10
-20
-30
-40
06
07
08
09
10
11
12
US exports
World exports
Macroeconomic data : United States
2016
2017
GDP %
1.4
1.9
Inflation %
1.3
2.5
Unemployment rate %
4.8
4.9
Target rate %
0.75
1.25
1.90
2.10
EUR/USD
1.10
1.15
2260
2530
EPS
5%
11%
PER
17.1
17.3
S&P 500
Indice
4th Quarter 2016
15
16
UNITED STATES
Interest rate
Currency
United States : interest rate
United States : exchange rate
In %
Index, JPY/USD
3.0
130
1.5
2.5
120
1.4
2.0
110
1.3
1.5
100
1.2
1.0
90
1.1
0.5
80
1.0
0.0
11
12
13
14
15
16
10 year T-Bond
3 month Libor USD
70
11
12
13
Trade-weighted exchange rate USD
JPY/USD
14
15
16
0.9
AUD/USD (R.H. Scale)
Imbalances caused by a change in legislation
The dollar stabilises
Advancing more than 20 basis points since July, the 3-month
LIBOR rate in dollars reached more than 0.85% at the end of the
last quarter. In the meantime, despite the market being jittery
over monetary policy in the United States, the 3-month interest
rate on the U.S. Treasury bond remained around 0.25%. Without
misinterpreting the risk of an interbank lending crisis, the movement of the LIBOR reflects a structural change in the legislation
on money market funds. However, the upturn in the 2-year U.S.
Treasury bond yield reflects the expectations of a second Fed rate
hike. The decision on this is expected to come in before the end of
the year. In fact, the slight pressure on interbank rates in London
has already led to a tightening of monetary conditions.
Fluctuations in the dollar have recently been eased by a series of
speeches by various governors of the Federal Reserve. Prices have
given rise to contradictory movements, depending on the level of
confidence in an imminent rate hike in the United States. Ultimately, the index value of the dollar was materially unchanged over
the last quarter.
Upward moving yield curve
Following the movements of short maturity yields, long-term bond
prices have also come under pressure. At nearly 1.6% just before
the autumn, the 10-year benchmark rate increased by around 10
basis points over the past quarter. The movement of the curve can
essentially be explained by the expectations of a normalisation of
monetary policy in the United States. Indeed, market and consumer expectations for inflation remained unaffected by the slight
increase in the consumer price index. In this context, the slope
of the yield curve was not impacted by any major movements.
While yield levels are more attractive in the United States than
in Europe, there is still a significant risk of volatility in the curve's
long-term segment. The cost of hedging foreign currency risk is
also no longer worth the investment.
4th Quarter 2016
Of the major currencies of developed countries, the greatest movements related to the pound sterling and the yen. Although the
dollar has continued to make gains against the pound, the U.S.
currency has continued its downtrend against the yen.
At its September meeting, the Japanese monetary authorities
chose not to increase its asset purchase programme. However, the
central bank outlined a new element of its policy by announcing
its concern over the shape of the yield curve. In an effort to ease
the pressures of the curve's flatness, bonds purchases will be divided so as not to weigh too heavily on the 10-year benchmark
rate.
This development may be taken as another sign that monetary
policies are close to reaching their limits. Excessive easing is weakening the financial system. With this in mind, the depreciation
of the currency through monetary policies would be increasingly
compromised. The euro even rose slightly against the dollar.
UNITED STATES
Stock markets
An upturn of earnings in sight
The fears of the beginning of the year have been well and truly
forgotten, as the U.S. market achieved 6.4% on the S&P 500
index and 9.3% on the small-cap index. Over the past three
months, investors have gained a fresh risk appetite towards
smaller-cap companies, abandoning more defensive sectors and
discounting the historically low volatility levels. Moreover, the
mid-year results season demonstrates the strength of U.S. corporations. Indeed, with slightly contracting earnings, they have
managed to mildly increase their margin and take analysts by
surprise. These surprises mainly come from growth companies,
new technologies and industry. The most cyclical sectors continue to be affected by the low commodity prices and the resulting restructuring operations.
United States : stock market indices
220
200
180
160
140
120
100
80
11
12
13
14
15
16
S&P 500
Nasdaq
Prospects
United States : stock market fundamental indicators
If no exceptional events occur, the 5% earnings growth estimate for 2016 should be achieved, or even exceeded. With the
continuing stabilisation of the dollar, oil prices exceeding a floor
of USD 40, and U.S. corporations showing sound organisational
adaptation, their margins have been maintained. 2017 is expected to follow this momentum with an increase of more than
10%. Abundant liquidity and exceptional interest rate conditions are fuelling high valuation levels, which do not support the
case for any hasty adjustments. Only volatility caused by political
events could throw off this regained uptrend.
18
14
12
16
10
14
8
6
12
4
10
11
12
13
14
15
16
P/E ratio
Summary
Economic growth will remain moderate in the United States at close to 2%.
In anticipation of corporate investment, households will continue to support the country's activity in line with the
expansion of the salary base.
Increased inflation will require the normalisation of monetary policy to continue.
Allocation remains in favour of equities and the anticipated rise in rates is not currently changing this decision.
The end to the appreciation of the dollar will enable a rise in corporate earnings, promoting a pick-up in investment
to support equity performance.
The prospect of rising interest rates could create volatility and continue the slight uptrend of the yield curve.
4th Quarter 2016
2
17
18
EMERGING REGION
Macro
The upturn needs confirmation
Given the support measures deployed by authorities, economic
growth in China progressed at a fast pace. Through its investments in infrastructure, economic activity in China is continuing
to show annual growth rates above 6%. Government support,
however, does not come without an effect on the budget deficit. Given its recent decline, the growing deficit is not a major
risk factor. On the contrary, the stability of the financial system
remains a matter of concern given the rise in debt and financing
channels outside the banking system.
With Brazil's changes of power and hosting of the Olympic
Games, the country has experienced a historic summer. The
surge in consumer sentiment seems to pay tribute to these
recent developments. Although these are positive signs, the
most concrete activity statements were still down, even if price
stability (exchange rate and inflation) points to some degree of
improvement. Likewise, Russia is not yet out of recession. At
the other extreme, economic expansion in India remained well
established at over 7%.
Unlike industrialised countries where the annual growth rate for
exports improved, the export statistics for emerging countries
overall did not see any major movements. By and large, slight
signs of improvement have emerged, but they are still not decisive enough to consolidate the economic recovery of the emerging world.
Chinese yuan
CNY/USD
10
8
6
4
2
0
-2
-4
-6
11
12
13
14
15
16
CNY/USD
3 months interest rate spread in % (R.H. scale)
Brazil: retail sales and consumer sentiment
10
120
115
5
110
0
105
-5
100
-10
95
11
12
13
14
15
16
Retail sales
Consumer sentiment (R.H. scale)
Macroeconomic data : Emerging region
2016
2017
GDP %
4.1
4.6
World trade %
2.7
3.9
Inflation %
4.6
4.4
Easing
Neutral
Index
880
1010
EPS
-2%
14%
PER
11.8
11.9
Monetary policy
MSCI EM
4th Quarter 2016
EMERGING REGION
Emerging debt
Decline in inflation in favour of returns
With the exception of Brazil (where the main consumer
price index continued to accelerate), inflation has declined in
the major emerging countries. In China, it fell to just 1.3%
over the summer. India also saw a drop in its main inflation
index. Russia too saw a decline, albeit to a lesser extent.
With this in mind, monetary policies have continued to be
accommodating. Citing a fall in inflation and depressed economic growth, the Russian central bank cut its key policy rate
by 50 basis points at its September meeting. In China, Brazil or
India, rates have remained unchanged, but targeted liquidity
supply provisions were deployed depending on the region.
In this regard, bond yields have followed the trend of inflation.
In particular, the 10-year benchmark rate in India continued to
ease, having dropped by more than 50 basis points over the
past quarter. While the 10-year government borrowing rate
also eased in Russia, its downtrend was rather bumpier, and
its yield to maturity decline proved much more moderate. On
the other hand, long-term rates in Brazil were affected by the
rise in inflation.
Debt in emerging economies benefited from the falling yields
of many developing countries. While fundamentals are still
fragile in some regions, the asset class has benefited from
tightening credit spreads. Many investors – demotivated by
the lack of returns on the dried up markets of the developed
world – have begun to show a new risk appetite. Be it in local
currency or dollars, overall debt prices in emerging economies
have risen. As a whole, assets in local currency have had the
upper hand in the last quarter, while corporate bonds have
also offered interesting gains.
Emerging economies : key monetary policy rates
In %
18
16
14
12
10
8
6
4
11
12
Brazil
Russia
13
China
South Africa
14
15
Indonesia
India
16
Turkey
Emerging bond markets : sovereign debt
In %
In %
4.5
4.0
3.5
3.0
2.5
2.0
11
12
13
14
15
16
Rates differential between sovereign debt and US 10-year Treasury bond
Emerging bond debt : HC vs. LC
In %
In %
20
15
10
5
0
11
12
13
1414
15
Rates differential, debt in dollars (HC)
Rates differential, debt in local currency (LC - R.H. Scale)
4th Quarter 2016
16
19
20
EMERGING REGION
Stock markets
The rebound continues
The MSCI Emerging Market Index ended the third quarter in
double digits, above and beyond developed markets. Within the
emerging area, once again Asia clearly stands out in comparison
to Latin America and European emerging countries.
Emerging countries : stock market indices
250
200
150
The BRIC countries outperformed the global index thanks to
China and the introduction of its domestic A-shares onto the
MSCI Emerging Markets index expected for 2017 at the latest.
Growth companies have been the preference of investors mainly
in large-cap companies. Moreover, cyclical sectors – long neglected due to their close ties to commodity prices – have widely
outperformed defensive sectors. The region is gradually regaining the confidence of foreign investors, benefiting from the
stabilisation of the economic and political framework, including
in Brazil. The export cycle, however, is lagging behind, which is
needed to create opportunities for investment and growth.
Return to profitability
The profitability of emerging companies is improving, underpinned by margins. Excluding commodities-related companies, the
profitability of shareholder's equity is similar to that of developed countries.
The growth in estimated earnings for 2017 has been revised
upwards (+11.8%), with higher growth than developed
countries and a significantly more attractive valuation. Positioning in these markets is strategic but further reinforcement with
growth factors is still required.
100
50
0
11
12
MSCI Emerging
Shanghai A share
13
14
MSCI Russia
MSCI Brazil
15
16
MSCI India
Emerging countries : stock market fundamental indicators
13
16
12
14
11
12
10
10
9
8
8
11
12
13
14
15
16
P/E MSCI Emerging markets
Summary
While the pace of growth is holding steady in India and China, confirmation is needed of the signs of improved
growth in Brazil and Russia.
Similarly, there may be ongoing heterogeneity in the inflation levels of the various countries.
The central banks of economies benefiting from a decline in inflation will continue to ease their policies.
Given the stability of the dollar and the rebound in commodity prices, the earnings of emerging companies are set
to pick up in 2017.
Yet stronger fundamentals are needed to increase exposure to emerging assets. In particular, there are ongoing
financial risks relating to excessive debt.
4th Quarter 2016
6
COMMODITIES
Oil price development
Commodity: performance index
In dollar
In USD per barrel
6000
140
30
5000
120
25
20
100
4000
15
80
10
3000
60
2000
5
40
1000
0
-5
20
11
12
13
14
15
16
S&P Commodity Total Return index
11
12
13
14
15
16
Brent
Spread Brent - WTI (RH scale)
Gold: ongoing risk of decline
Oil: a price target of $60 in the long run
After a strong surge at the end of spring – brought about by a
wind of risk aversion in financial markets – the enthusiasm for
gold faded during the summer. In fact, prices show upward and
downward trends, particularly due to market shifts in connection
with the forecast of the next rate hike in the United States. Reflecting exchange rates, this built-up volatility was not rewarded and
the price of gold just before the autumn was ultimately slightly
lower than at the beginning of the last quarter. Whilst silver and
platinum showed no advantage over the price of gold, palladium
stood out for its sharp appreciation during the first few weeks of
the summer. In the future, the price of gold could benefit from
external events tied to the political agenda on both sides of the
Atlantic. In particular, the outcome of the U.S. presidential elections and the result of the referendum on the constitution in Italy
could have a temporary impact on the price of gold. However,
the greater stability of the dollar is weighing on the potential
appreciation of gold. What's more, envisaging a normalisation of
monetary policy in the United States, we expect to see a sideways
trend with a larger risk of decline for this last quarter of the year.
Oil prices have been very volatile this summer. Showing a strong
downturn in July, prices then started to work their way back
up, regaining a part of the losses made at the beginning of the
summer. Nonetheless, just before the autumn, prices had fallen
by around 5% since the beginning of the quarter.
Prices of industrial metals have also pointed to a certain downtrend
over the summer. Once again, volatility has dominated price developments without establishing a trend. This was particularly true
of aluminium and copper, whose prices lost a few percent over
the past quarter. Given the lack of accelerated growth, we do not
anticipate any significant price increases.
Essentially, oil prices have recently shown the impact of three different factors: fluctuations in the dollar due to market doubts
over the next Fed rate hike; statistics on crude oil stocks in the
United States; and the debate over a possible agreement on freezing the production of the major global players. Specifically, rumours about the dealings between Russia and Saudi Arabia gave
rise to price fluctuations. With this in made, the forecasts on the
outcome of the OPEC Summit at the beginning of the autumn
have stirred up the markets.
Aside from the various – yet difficult to predict – scenarios on
a potential agreement, the U.S. administration's energy assessments now predict that the market will soon be rebalanced. In
other words, the demand is expected to return to the top of the
market in 2017 due to tightening supplies. Despite the reduction of excess capacity brought about by the historic fall in prices,
there is currently still a supply glut.
This reinforces our scenario where oil prices will continue to pick
up in stages. Another element of this argument is the drastic
decline in investments announced here and there by major oil
companies, which will have a negative impact on future production capacity.
4th Quarter 2016
21
22
Redaction
The Strategic Committee
Constantino Cancela
Director,
Head of BCGE Asset Management,
BCGE Group Chief Investment Officer
Valérie Lemaigre
Chief Economist,
Head of Investment Office,
[email protected]
Constantino Cancela, Head of BCGE Asset Management,
Chairman of the Strategic Committee
Chantal Fellay, Head of Investment support,
Secretary of the Strategic Committee
Valérie Lemaigre, Head of Investment Office,
Member of the Strategic Committee
Marc Riou, Head of Institutional Portfolio Management,
Axel Moser, Head of Private Portfolio Management,
Yann Schorderet
Economist,
[email protected]
Pierre Sauvagnat, Head of Financial Markets & Treasury,
Pierre Weiss, Institutional Portfolio Manager,
Amin Khamsi, Private Banking,
Jean-Paul Dellenbach, Senior Vice-President,
Eric Wesse, Chief Executive Officer of BCGE France,
Nicolas Demierre, Head of Global Commodity Finance,
4th Quarter 2016
23
Impressum
Publisher : Banque Cantonale de Genève,
Communication & Investor relations
Quai de l'Ile 17, CP 2251 - 1211 Geneva 2
Tél. : + 41 22 58 211 21 00
Editor : Hélène De Vos Vuadens
Coordination : Grégory Jaquet ([email protected])
Design : Grégoire-Pierre Dufeil
Copies : 600
Printing : NBmedia
Disclaimer
The Investment Strategy of the BCGE Group is established by the
Strategic Committee of the Banque Cantonale de Genève, for the
needs of the BCGE Group. As a rule the investment strategy, as
exposed in this present document, applies to the management
of all the portfolios, entrusted by our customers to the portfolio
managers of the BCGE Group. BCGE Asset Management staffs
support the Strategic Committee by their financial and stock
markets analysis. They write the present document. The information contained in this document is based on reliable data and
statistics; in no way can they commit the liability of BCGE Asset
Management, the Strategic Committee, the Banque Cantonale
de Genève, or the BCGE Group.
Copyright : Any full or partial reproduction of texts, graphics
or illustrations requires the explicit authorization of the editor
Photograpy, Illustrations & Graphic : Fotolia, Loris von
Siebenthal, Datastream/Thomson Reuters, BCGE Asset Management
4th Quarter 2016
Banque Cantonale de Genève
Head Office : Quai de l’Ile 17 – CP 2251 – 1211 Geneva 2
Telephone : +41 (0)58 211 21 00
E-mail : [email protected]
www.bcge.ch
Geneva : Quai de l’Ile 17 – CP 2251 – 1211 Geneva 2
Lausanne : Avenue de la Gare 50 – CP 159 – 1001 Lausanne
Zurich :
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www.bcge.ch/privatebanking
www.bcge.ch/assetmanagement
REPRESENTATIVE OFFICES
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BCGE group investment strategy

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