Weekly Insights 12/11/2017


  • Euro zone: The economy is advancing at a 2.6% pace YoY.
  • US: Increasing non-farm payrolls, above expectations.
  • Asset allocation: We remain in favour of equities over bonds. Within equities, we have a positive stance on European, especially small and mid-caps, and Japanese equities. 

Asset Allocation :

The story continues and the Goldilocks environment in which it is “neither too hot, nor too cold but just right” prevails. Indeed, as the last US job report of the year confirmed that employment in the US was on the right path and better than expected. Wage gains however remained below expectations.

In this combination of positive growth and little inflationary pressures, we expect the investment environment to remain favourable in 2018.

This week Central Banks will be on the agenda:

  • The Fed will meet and is expected to announce a 3rd interest rate hike in 2017;
  • The ECB will publish an update of growth and inflation estimates through 2020;
  • The BoE will probably stay on hold when it sets policy on Thursday, its assessment of the next phase in the Brexit negotiations should be of interest.

In the US, the tax bill has yet to be finalised and it is expected to lower corporate tax rate
to 20%, effective in 2018, while maximising the amount of individual tax relief and ensuring it remains below the $1.5trn deficit cap.

Our current investment strategy on traditional funds:

grey : no change
blue : change


While we are positive on equities and still positive on both EMU and Japan, we approach the end of the year and want to lock in our gains while using cautiousness.

  • Global economic momentum is accelerating further however, geopolitical risks remain an obstacle with tense relations between North Korea and the US as well as in the Middle East, between Saudi Arabia and Iran.
    • We concentrate our portfolio’s regional positioning on the euro zone and Japan. Emerging markets could face some headwinds if the USD strengthens.
  • Central bank divergence becomes more obvious:
    • The Fed has started its balance sheet reduction and another rate hike in December looks likely.
    • The ECB has announced that it will pursue its quantitative easing but will cut the amount to EUR 30bn starting next January. Asset purchases will continue for at least 9 months in 2018 and interest rate increases should not happen before 2019.
  • Equities have an attractive relative valuation compared to credit.


  • We remain positive on euro zone equities which are supported by a strong economic and earnings momentum and relatively attractive valuations. We have increased our exposure to European small caps on the basis of good visibility on the domestic European profit cycle.
  • We have kept a neutral tactical stance on emerging markets equities, as a result of the current USD level and technical indicators.
  • We remain negative on UK equities. The hawkish BoE monetary policy stance has put a barrier to GBP depreciation, challenging overseas profit growth. Domestic political wobbles add to difficult “Brexit” negotiations and limited results in setting-up new trade relations. The Autumn Budget Statement confirmed the dull outlook.
  • We remain neutral on US equities. While we see progress on the upcoming tax bill, the case for interest rate hikes is coming together. At least the transition from Janet Yellen to Jerome Powell should be smooth as he presents himself as “a pragmatic moderate”, who would - largely - continue the Fed’s current policies.
  • We are positive on Japanese equities. A strengthening growth and a supportive domestic policy mix are among the main performance drivers and we have gained more conviction that the Bank of Japan will not join other central banks in tightening its monetary policy anytime soon, which should ultimately lead to a weaker JPY. Furthermore, Japanese earnings have been progressing so far without depreciation of the JPY.


  • We are negative on bonds and have a low duration. The improvement in the European economy could also lead EMU yields higher as political risks recede and the ECB remains overall dovish in its QE recalibration.
  • With a tightening Fed and expected upcoming inflation pressures, we expect rates and bond yields to continue their uptrend from September’s low.
  • We continue to diversify out of low-yielding government bonds:
    • We have a neutral view on credit, as spreads have already tightened significantly and a potential increase in bond yields could hurt performance.
    • We have a diversification in inflation-linked bonds.
    • We keep our diversification to emerging market debt, as the on-going monetary easing represents an important support.
    • We are more or less neutral on high yield. The correction on US High Yield observed recently is not expected to continue. 

Macro :

  • In the US, non-farm payrolls increased by 228K, above market expectations of 200K. Employment continued to trend up in professional and business services, manufacturing and health care.
  • US jobless rate remains steady at 4.1% in November.
  • In the euro zone, the economy advanced by 2.6% YoY in Q3 2017, above the preliminary estimate of 2.5%.
  • GDP growth picked up in Germany, France and Italy but remained unchanged in Spain. 

Equities :


Positive week for European markets.

  • Main winners last week were the real estate and euro zone banks segments due to the progress of the US tax reform bill and some clarification on capital requirements in Europe on the Basel rules.
  • Travel & Leisure strongly outperformed following the advanced discussion between Ladbrokes and GVC holdings.
  • Oil & Gas and Basic Resources underperformed on lower commodity prices.
  • Country wise, the FTSE MIB was the best performing index and the FTSE 100 underperformed slightly as the GBP gained vs the EUR.


Another mixed week for US markets.

  • US stocks regained some vigour last Friday after the release of a better-than-expected November jobs report.
  • The rebound came also a day after both the US House and Senate passed a two-week stopgap measure to keep the government funded, avoiding a government shutdown.
  • The Health Care sector was in the spotlight with Gilead Sciences in the process of buying Cell Design Labs. Other big gainers in the sector were Vertex Pharmaceuticals, Mylan and Celgene Corp.


Emerging markets tumbled to near two-month lows last week.

  • A selloff in the Technology segment and geopolitical concerns over North Korea and the Middle East soured risk sentiment and caused investors to continue a rotation out of tech stocks, hitting index heavyweights in Asia.
  • Emerging currencies also turned weaker due to a firmer USD.
  • South African stocks traded at six week lows after a selloff in Steinhoff shares following an investigation into accounting irregularities.
  • Shanghai also headed towards a near four month low after the director general on the People’s Bank of China research institute gave out fears of tightening.

Fixed Income :


Flattish German and US rates last week.

  • Despite the announcement on the Senate tax bill and the decent US jobs report (strong payrolls but tepid average hourly earnings), US and German rates were flattish over the week.
  • By contrast, the 10Y UK Gilt surged by 6bps over the week after the EU and UK reached an agreement in principle on the citizens’ rights, the Irish border and the €45bn divorce bill.
  • 10Y US, UK, Japan and German yields stood at respectively 2.37%, 1.29%, 0.037% and 0.30%.


Slack credit market last week.

  • Investment Grade cash remained flat at 90bps while High Yield widened by 10bps to 287bps.
  • Regarding derivatives, iTraxx Main tightened by 1.5bps and iTraxx Xover remained flat at 231bps.
  • Low volumes on the primary markets due to the end of year period.


Outperforming USD last week.

  • Progress of the US tax reform and a delayed debt ceiling deadline spurred the USD as it outperformed all of its main peers.
  • The NOK was boosted by better-than-expected economic data (Manufacturing PMI and Regional Survey).
  • Despite an agreement in the Brexit process negotiations, the GBP didn’t benefited as much as anticipated. 

Market :