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Equity Letter - “We were on the edge of the abyss and we have taken a big step forward”



At first glance equity markets appear to have limited upside. However, there is at least one good reason to be constructive: when inflation is exposed to upward pressure worldwide, this should feed through to an improvement in the outlook for nominal growth and more specifically for earnings growth.

Our focus this month is on our Green impact thematic equity strategy which invests in European companies generating a significant part of their revenue from the development of green technologies, thus accompanying the energy transition



If we stay rational, we must admit that at first glance equity markets appear to have limited upside. We can even say that we are currently facing an asymmetrical situation where the downside is probably twice as big as the upside. That said, who cares about rationality after a 2016 marked by a succession of unexpected events and still more unexpected market reactions?

Currently markets are definitely determined to see the glass half full rather than half empty and there is at least one good reason for that: when inflation is exposed to upward pressure worldwide, this should feed through to a brighter outlook for nominal growth and more specifically for earnings growth. This element will be key given that we are facing stretched valuations and badly need support from earnings dynamics.





In the US we are slightly sceptical about profit growth but cannot exclude higher earnings generated by lower tax rates and still very aggressive buybacks. In Europe on the contrary we are much more optimistic on the earnings outlook. Europe is probably one of the regions most sensitive to higher inflation. Given the more rigid cost structure, it is inflation which will be key for a recovery in margins. In addition, latest economic data have been encouraging and confirm that the recovery is well in place, while the historical drag from sectors such as Energy and Banks is abating or even reversing. In Japan and in Emerging Markets we are reasonably constructive on this front but with the caveat that the story remains currency-dependent.

This leads us to favour Europe. More than specific themes or sectors, at this stage we believe it is stock picking that offers that biggest opportunities, alongside a likely booming M&A cycle.




Romain Boscher, Global Head of Equities





2017: The year of the earnings rebound?

For the past six years, earnings anticipations at the start of each year have turned out to be too optimistic. How are we situated this year? The accompanying chart plots consensus and Amundi forecasts for 2017 over the past twelve months. It is interesting to note that:

  • The two lines intersect in December 2016 when Amundi became –and still is- more optimistic than the consensus on the earnings outlook for this year.
  • Earnings momentum according to us remained positive at the end of January, which should translate into further earnings upgrades for 2017.

Amundi’s more positive view can be explained by the following factors:

  • Higher earnings forecasts for all resource-related sectors, in parallel with (Energy) or in anticipation of (Metals and Mining) the rebound in commodity prices (Amundi is currently anticipating 65 to 105% earnings growth in energy and natural resources sectors in 2017).
  • The end of downgrades in all financial sectors since October 2016 (steeper yield curve, upward revision of leading indicators, more supportive market environment)

At this stage, we don’t expect any downgrade of consensus forecasts for the following reasons:

  • Consensus expectations ex natural resources (i.e energy and materials) are at 9.7% which looks reasonable given the macro-economic environment
  • Consensus forecasts for financials (10% for banks and diversified financials, 4% for insurance) seem realistic in the current interest rate environment
  • Only the construction materials sector, which accounts for only 1% of market capitalisation, can disappoint in the short term.

2017 should be the year when earnings growth expectations are confirmed by actual earnings reports, with in our opinion low risk of downside surprises barring exogenous shocks (decline in commodity prices, geopolitical risk, unexpected currency movements).

Stéphane Taillepied, Head of Equities Research










Volatility: the calm before the storm?

Equity markets have been trendless since the start of the year with very little volatility, especially compared with last year. The volatility of equity indices has declined (the Vix and the VStoxx are at their lowest levels since summer 2014) even though volatility has remained high in most sectors.

This low level of risk aversion on equity markets is due mainly to the sharp fall in correlations between the different components of the index, following the recent sector rotation. For example, the 3-month realised correlation on the Eurostoxx 50 has declined from close to 75% in summer 2016 to less than 30% at present.






Equity markets are focusing on the pro-business measures of the Trump administration and are shrugging away the risk of disappointment due to possible implementation difficulties. Other indicators of market stress, such as the GFSI (Global Financial Stress index), the MOVE (bond volatility index) and the CVIX (currency volatility index) reflect higher levels of investor concern.

It is highly likely that a spike in bond and currency market volatility would spill over to contagion on equity markets, where the current attractive level of volatility makes it possible to buy protection at a relatively low cost.






Eric Hermitte & Gilbert Keskin
Co-Heads of Volatility and Convertibles


Two approaches to Smart Beta investing


When considering Smart Beta strategies, investors usually have either one of the following two objectives in mind:

  1. They want to make a better use of their risk budget and eliminate unrewarded risk exposure 
    Our Conservative approach seeks to eliminate specific and macro risks that we expect not to be rewarded by the market. Such risks include volatility, but also financial or ESG related risk. Our Conservative approach also carefully monitors the valuation level of the portfolio as well as its exposure to interest rates as some Low Volatility stocks may overheat and show an above average exposure to interest rate risk.
  2. They want to generate excess return by actively seeking exposure to secondary risk premia such as Value or Momentum 
    A number of factors such as Value or Momentum are expected to generate positive excess returns in the long run. While some investors may invest in these factors on a single basis, most of them choose to use a combination of them, as the excess returns of these factors tend to be uncorrelated, or even negatively correlated one to the other. For example, the Value factor tends to be negatively correlated with the Momentum factor, and their combination results in a portfolio with higher positive expected excess return and lower tracking error than if it was invested in single factors. Further, the combination of several factors alleviates the concerns that some investors may have regarding the valuation of any given factor at a given moment.


Bruno Taillardat, Head of Smart Beta

Frédéric Hoogveld, Head of Investment Specialists, Index and Smart Beta


Green impact thematic equity strategy 



Global warming and the declining of resources are now recognized as events leading to physical and financial risks impacting society and companies.

In order to remedy these issues, national and international regulations have been put in place in order to reduce their impact on the environment and to favour the energy transition.

Thus, the green technologies thematic consists in optimizing the use of current energy resources and developing alternative sources of energy. This thematic has a short, medium and long-term effect thanks to the support provided by the energy transition and is also multisectorial: covering industry, transportation services, technology, engineering, etc.

In this context,our green impact thematic strategy offers a suitable solution for investors wishing to benefit from growth opportunities in green technologies.

Our strategy is a thematic equity portfolio, invested in European companies generating a significant part of their revenue from the development of green technologies, thus accompanying the energy transition.


Definition of the investment universe

The investment universe is defined in collaboration with Amundi Expertise ISR department and consists of the selection of European stocks generating a significant part of their turnover in green technologies irrespective of the economic sector to which they belong.

The investment universe is divided into three thematics :

  • Alternative Energy & Clean Technology and Services
  • Energy Efficiency
  • Waste & Water

The investment universe also excludes companies producing fossil fuels and present in the nuclear industry. Finally, it respects the SRI principles defined within Amundi.

This stable investment universe is reviewed twice a year and is made of about 130 stocks.


Our green impact thematic portfolio

Based on the predefined investment universe, the final portfolio is constructed using a quantitative approach in order to minimize its volatility while seeking to maximize its diversification.

Our portfolio is a non-benchmarked portfolio as its investment universe differs from a standard market capitalisation index. By construction, some sectors, such as Energy, Finance, Health Care, are structurally not part of the investment universe. All European countries and all sizes (small, medium and large capitalisation) are represented in the portfolio.

Since its launch in April 2013, our strategy has delivered a gross annualised performance of +10%.





Isabelle Lafargue, Deputy Head of Index & Multistrategies

 Ludovic Ferreira, Index & Smart Beta Investment Specialist


BOSCHER Romain , Co-Head of Equities
MELHUISH Nicholas , Chief Investment Officer, Equities – Amundi London
IWANAGA Yasunori , CFA, CIO Amundi Japan
HO Anthony , Chief Investment Officer - Asia ex Japan
DRABOWICZ Alexandre , Head of Development and Investment Specialists, Equity Strategies
ANDRE Sudeshna , Investment Specialist, Equity Strategies

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Equity Letter - “We were on the edge of the abyss and we have taken a big step forward”
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