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Asset Allocation Letter - Back to fundamentals



Euroscepticism is waning. Europe was the central focus of the French presidential election. Emmanuel Macron’s victory has laid to rest the spectre of significant destabilisation in the Eurozone. The markets embraced this much calmer outlook over the last few weeks. We can notice that European equities are resuming the trend started in late January and the spread between French 10-year rates and their German counterparts has narrowed as well.

In Europe, economic sentiment is at its highest level in 10 years. The decrease in medium-term political risk should help refocus investors' attention on the high quality of economic fundamentals. In this respect, the Eurozone’s recovery is on a more solid footing. Recent data releases have been clearly encouraging. Core inflation has stabilised at around 1% while, at the same time, April’s business opinion surveys rose considerably1, extending a trend that has continued unabated over the last eight months. What is more, the European Commission’s Economic Sentiment Survey for April climbed to a ten-year high. 




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European economic performance continues to surprise. Despite the uninterrupted flow of good news since the beginning of the year, it is worth noting that the net balance of economic surprises2 held on to its four-year high. In other words, analysts were overly cautious about European growth. This factor is important insofar as it determines the behaviour of European risky assets (equities and credit). A finer breakdown of equity returns, allowing us to separate the effects of multiple expansion from the effects of dividend growth, highlights that only half the performance of European equities is based on multiple expansion. The momentum of risky assets is therefore far from being at risk of running out of steam.

Despite the question mark related to the scale of tax cuts in the United States, the forces of reflation should remain at work in 2017 in our central scenario. The dangers will come from economies that are well advanced in the business cycle such as the United States and China. In the United States, the issue of tax reform remains a tricky one. It would appear that the Trump Administration’s original plan carries the risk of a substantial increase in deficits3. We now have to consider that the Administration may be compelled to implement tax reform on a far smaller scale than originally planned. Nonetheless, the anticipation of this reform has been one of the factors of what investors are calling “reflation trade” (theme developed later in our focus).

Moreover, the recent downturn in commodity prices, in particular  crude and steel, sounds a more cautionary note on the Chinese economy, which, admittedly, has performed better than expected so far. This is why we have remained only moderately optimistic since the beginning of the year. implementing macro hedges along with our position in risky assets. We prefer hedges with underlying liquid instruments such as equity volatility, or long-maturity US bonds, which are adapted to the risks carried by our portfolios.


1. The Eurozone Manufacturing PMI rose to 56.7 in April, up 0.5 points, while the Eurozone Services PMI came in at 56.4, up 0.4 points.
2. Difference between published economic data and the consensus forecast. The net positive balance of surprises means that there are more data releases exceeding expectations than lagging.
3. In any case, this is the view of the Congressional Budget Office, which estimates that a 1-point decrease in the corporate tax rate, now at 35%, will cost nearly $100 billion over 10 years.


Laurent Tignard

Global Head of Multi-Asset,Institutional Clients




Investment scenarios

  • Our central scenario, based on a limited but stabilized global growth remains valid - around 3.3% per year in 2016-2017 – with a 70% probability of occurrence (stable). US growth should be slightly higher than expected for 2018 (2.2% vs 1.7%) and Developed Economies globally driven by domestic demand (Europe, US, Japan). Emerging Markets should improve benefiting from the stabilization of oil prices. This environment should favor risky assets and also QE friendly assets (Euro Corporate and Equities, Peripheral Sovereign Debt).
  • Our first alternative scenario(stable at 20% probability) assumes an acceleration of US growth as well as US inflation expectations thanks to fiscal expansion leading markets to reprice rates higher and USD stronger, with the Fed eventually more aggressive than initially anticipated. It would create a widening gap between disappointing growth expectations and sustained inflation expectations.
  • Our second alternative scenario sees a global growth slowdown with 10% probability of occurrence(stable). The trigger could be a deterioration of the US economy (Trump downside), tighter policies in China or the consequences of the Brexit vote.

Positioning under our central scenario

The intermediate risk budget is stable at 6 out of 10.

  • On equity markets, we remain moderately long

-    Geographically, we reduce our long exposure to Eurozone (take profit even if the region remains supported by both earnings upwards revisions and relatively attractive valuations). We increase our overweight Japan as valuation is attractive and earnings momentum very strong. We  maintain our underweight on US as valuations are at all-time highs and earnings momentum are losing steam. On Emerging Markets, we keep a neutral stance as there are still question marks related to USD level, US interest rates hike and risk on US tariff policy. However EM equities are cheap and earnings recovery underway. We keep the underweight on Europe ex-EMU as valuations are extremely expensive especially in Switzerland and UK.

-    Sectors/factors: we still favor the Value bias in Eurozone and keep a balanced exposure between “Quality” and “Value” in the US.     

  • In the fixed income space, we keep an underweight exposure in nominal duration and a long exposure to higher yielding FI assets

-    Rates: we maintain a short duration exposure to Core Eurozone and a moderate long exposure to Peripherals. We keep a slightly long US duration (just as macro hedging).

-    Credit: we are still globally positive on the asset class. The overweight exposure is still balanced between Industrials and Financials. We still have long positions on Euro High Yield and we could potentially arbitrate to favor EM debt in local currency. We reduce our exposure on US High Yield (fair value and oil price sensitivity).

  • Currencies: we maintain a long position on JPY but we do not implement other significant exposure on Forex.
  • Macro Hedging: we maintain equity volatility as the main macro hedging position in a context where there is currently a lack of appealing hedging options.

Cross asset views and portfolio positioning

2017.05 - asset allocation letter - graph 1


What really is the reflation trade ?

We believe that what the markets call the “reflation Trade” can be divided into two different aspects.The first aspect, which started before the election of Mr Trump, is the proper reflationary trade meaning higher nominal growth priced in financial markets. We believe that this element is first and mostly due to the very accommodative economic environment and monetary conditions enjoyed in the 2nd half of last year : thanks to higher oil prices, tighter credit spreads, very low real interest rates (FED on hold for most part of the year), depreciating USD,  and supportive economic policies in China, macro momentum has improved in the US and in most part of the world. With higher oil price, tight labour markets (US), and better macro momentum (led by an improving manufacturing sector after a very depressed 2016H1), markets have started to cut the implicit probability of deflation/recession priced into financial markets and to revise higher inflation/growth expectations. This had led to a bullish momentum for equities, with an outperformance of value stocks and financials as well as higher US rates and the USD.

The second aspect of the “reflation trade” is directly linked to the US presidential election and to Mr Trump’s announced fiscal policy. Indeed, according to the electoral program, investors have started to price in the impact of the infrastructure spending plan, of the corporate tax reform and of the border-adjustment taxes on US inflation. This second leg of the “reflation trade” has seen a further dollar appreciation, a continuation of the value stocks and financials outperformance, and has also seen a further increase in global bond yields. The “Trump reflation trade” has been also sustained by a positive confidence shock with a positive impact on risky assets, at least until the end of the last year.

2017.05 - asset allocation letter - graph 2



While stocks continued to make new highs through February, market leadership has shifted dramatically compared to what we saw immediately following the election. In the initial month after the election, the rally was led by Value, low quality and high beta names. But since early 2017, those leaders have turned into laggards as the preannounced program seems to take more time than previously expected by investors.

Due to stretched valuations, any disappointment on Mr Trump’s capacity to deliver at least part of the fiscal package will be clearly sanctioned by market participants, especially on expensive US equities. That said, we believe that a more consensual approach regarding global trade and less confrontational views regarding foreign currency management are good news as no-one, not even the US, would benefit from high FX volatility, currency war, protectionist measures and flying USD. Additionally, we are of the opinion that the first part of the reflation trade is still very valid : macroeconomic environment seems solid, oil prices are expected to stay relatively unchanged at a level that will not scare financial markets, inflation figures have positively surprised, especially in the Eurozone where deflation fears were still alive, FED has some room for manoeuvre to continue to gently tighten US rates (as growth momentum is solid and terminal Fed fund rates are expected to remain low in a highly leveraged system and late cycle environment) and the US are well aware that a spike in the USD Trade Weighted Index would be detrimental to the US and the rest of the world economy.

This is the reason why we continue to be positioned for a continuation of the reflation story, especially on equities (long and value) in combination with some search for yield approach (EMD) and cautious view on core rates (playing some range trading).

2017.05 - asset allocation letter - graph 3



In the equity universe, we believe that Value stocks can continue to perform well, at least for the coming quarter, as main risks to value performance, namely the collapse of the Chinese economic model, the US recession and the risks of deflation, have faded. In addition value stocks’ return on equity is globally improving, namely in the Eurozone and Japan where we identify names with rising profits and still very attractive multiples. In our Multi-Asset portfolios, our Eurozone value stocks  (excluding financials) trade at 1.2x 2017 price-to-book value vs 1.6x for the MSCI EMU. Japanese value picks trade at 1.1x versus the MSCI Japan at 1.2x. In the US, value names, mostly represented by energy and consumer discretionary stocks are relatively less attractive and cannot afford a weak oil price, however as long as the Brent stay around the $50bn, US value names are attractively valued versus the overall US market.


In the fixed income universe, we are short duration in benchmarked funds and have very limited exposure  to core sovereign bonds (especially German and French bonds). In the US, the recent bond market positive performance should be seen as temporary. Tight labour market and rising wages should ensure a pick up in core inflation, driving the 10 US Treasury to our target (2.6-2.8%). In addition to the short duration, we keep an overweight to corporate bonds and namely to high yield corporate bonds as spreads should continue to tighten in a supportive growth environment. 


Amélie Derambure

  Multi-Asset Portfolio Manager



Gross performances of our strategies (April 28th, 2017)

Amundi, data as at end of April 2017. Gross performance of “Balanced Institutional Absolute Return Low volatility “, Multimanager Multi-Asset Fund of Funds (Bonds)“ GIPS composites in euro. Their respective benchmarks are: Eonia capitalized and a composite benchmark: 50% JPM EMU Government Bond Index, 30% JPM Government Bond, 20% Exane ECI – Europe Convertible. Past performance is not a reliable indicator of future results or a guarantee of future returns.

2017.05 - asset allocation letter - graph 4


TIGNARD Laurent , Global Head of Multi-Asset, Institutional Clients
PASCAL Frédéric , Deputy Head of Multi-Asset, Institutional Clients
TAZE-BERNARD Eric , Chief Allocation Advisor
BEN ABDALLAH Marc-Ali , Senior Analyst, Investment Solutions
NETO Florian , Client Portfolio Manager
LEVY Dan , Head of Multi-Asset Investment Specialists
GUILLEMOT Bénédicte , Investment Specialist
DEBOUT Leslie , Investment Specialist

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Asset Allocation Letter - Back to fundamentals
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