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Key Charts
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US and Europe FCIs reflect movements in several financial assets ranging from Money Market, short and long term interest rates, credit spreads and equities’ realized and implied volatilities. A reading below zero means financial conditions are tightening. 
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TW$ Broad and risk sentiment TW$ broad (50% EM) proxies global liquidity. Historically, huge appreciations have been accompanied by equity market corrections. 
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Moody’s spread BAA – AAA Historically credit cycles have anticipated risky asset downturns. While some deterioration occurred recently, it is not yet capitulating (100 alert threshold) 
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Earnings Yield / Moody’s spread BAA – AAA ratio Walking on a tight rope: corporate leverage, default rates, VIX has to be monitored 
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Global Asset Classes and Cross Asset views
2018 Q4
Assessment - Spotlight on Global Asset Classes
Core Gov. Bonds – LT yields driven by Fed and US cycle, ECB gradual in QE exit
Monetary Policy Views |
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FED: we’re expecting the FED to deliver one additional rate hike in December, and two hikes in 2019, in line with market expectations. The market remains far from the dots in 2020. ECB: the ECB reiterated its forward guidance: “interest rates to remain at their present levels at least through the summer of 2019”. The markets point to no rate hike until the first quarter of 2020 and to a prolonged period of reinvestments. The minutes of the last meeting show that, despite the positive growth outlook, risk to activity is tilted to the downside. BoE: against such a difficult political backdrop, the BoE pledged to continue with “an ongoing tightening of monetary conditions” at a gentle pace. We do not expect any other interest rate hike in 2018, as no rush in further hikes has been underlined and Brexit negotiations are entering a critical period. BoJ: kept its monetary policy unchanged, and introduced more flexibility in its asset purchasing programme (upper limit of fluctuation on the JGB increased from 0.10% to 0.20%).
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Consensus has become more dovish about QE exit, not only on FWD rate guidance but also on reinvestment period, expected now to last 3 years. The minutes of the last meeting show that downside risk is currently the major one on the radar screen, “with risks relating to rising protectionism, vulnerabilities in emerging markets and financial market volatility having gained more prominence recently”. Some representatives of the ECB recently suggested that a wait and see attitude until the beginning of 2019 could be best, in order to better assess if and how risks may impact communication on eventual changes in implementing QE exit. |
DM Credit – Resilient to Italy in Europe, valuations look tighter in US HY
EUR credit is resilient with a more attractive valuation |
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G4 FX used to mae adjustments in flows
Signs of caution, but beware of relief rallies… |
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The 2018 divergence between rising US stocks and the declining rest of the world was finally resolved by a downward convergence. |
Historically, two macro factors are key to endorsing a lasting reversal in favour of defensive stocks. The rate factor, largely led by the US and which remains pro-cyclical at the moment, and the industrial raw material factor, largely under China's influence since the 2000s. The cyclicals/defensives ratio clearly followed this second factor on the downside, indicating the prevalence of risk on global growth. |
US Equity – The leading equity market in this cycle
High Conviction IdeasValuation The 12-month trailing P/E eventually consolidated sharply (from 22x to 18x) thanks to strong EPS growth in 2018 and a just positive performance YTD. But the relative forward PER is rich. Fundamentals The strong rise of EPS in 2018 (+23% due to tax reform and share buybacks) will be a one-off. Ibes EPS forecast of 10% for 2019 will be revised downward given the expected slowdown of the economy (see the strong link between ISM New orders and the Net up). But EPS growth is due to remain above the MSCI World. Technicals The S&P 500 has come back towards its rising 200-day moving average which is still on an uptrend. Relative to the MSCI World, it presents some short term excess. Style/Size/Factors Clear preference for Quality, but beware valuations. Some bottoming out of MinVol (positive watch) What to Watch
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EMU – Under the threat of political riskHigh Conviction IdeasValuation With a relative P/E one standard deviation below its average, valuation looks attractive but the political situation (Brexit) warrants a risk premium. Fundamentals EPS growth is fading from a peak in 2017 to 10% in 2018 and 8% in 2019 according to Ibes. This typical late cycle play - proxy of Energy/Industrials and high DY (4.7%) – could eventually suffer from a rising GBP, should a deal be reached on Brexit (Amundi core scenario). Technicals Death cross in place, but the market is oversold (80% of FTSE100 stocks below their 200D Moving Average) Style/Size/Factors Quality first. Min Vol bottoming out (positive watch) What to Watch
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UK – A late cycle play but Brexit is disturbing
High Conviction IdeasValuation The setback of the relative PER is due both to the underperformance of the index and the earnings. The political risk (Italian budget, Brexit, EU elections) requires a risk premium. Fundamentals EPS growth, possibly one of the weakest in the world in 2018 (+6%), is due to accelerate to about 10% next year according to Ibes, slightly below the US. But the economic slowdown, already high margins and EMFX turmoil are serious headwinds. Technicals MSCI EMU is now trending down, below its declining 200-day moving average. The breath is extremely low approaching the level of Feb 2016. − Style/Size/Factors Prefer Quality, but beware valuation. Bottoming out of High Div (positive watch). What to Watch
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Japan – The profit cycle has already peakedHigh Conviction IdeasValuation
The P/BV is rising from a very low level in parallel with a rise in RoE. Japanese companies’ leverage is also rising from a low level. The P/BV is still below average compared to the MSCI World.
The relative position of the Topix vs. MSCI World, both in terms of the index and in terms of EPS, is rather neutral. Japanese earnings growth will fade to ca. 4% next year, according to Ibes.
The relative performance very much depends on the Yen. As the trade war is far from ending, not sure that this cheap currency has a lot of room to depreciate much further.
No clear preference at the moment.
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Pacific ex-Japan Equity - Cheaper but still trending downHigh Conviction IdeasValuation
Pacific ex-Japan remains cheap with a relative PER to MSCI World at -1 standard deviation below average.
The EPS trend is clearly negative vs. the MSCI World. Otherwise, Australia makes up 57% of the region and Hong Kong 29%. Hence, it is highly affected by China’s policy and its impact on industrial commodity prices and trade. A pro-infrastructure stimulus in China would help this regional market to bounce back, but the timing and sustainability of this movement are uncertain. A MSCI Pacific ex-Japan death cross is in place both in absolute and relative terms to the MSCI World. What to Watch
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Emerging Market Equity – NeutralHigh Conviction IdeasValuations Implied COE and PE are close to historical average. Also in terms of macroeconomic fair value (the over/undervaluation coming from the comparison with the global and domestic cycle) we are close to neutrality at the current levels: however our internal scenario is coherent with a limited upside on a 12-month horizon Fundamentals
The deceleration in EPS growth has already been happening since the beginning of 2018. Revisions are decreasing. Taking into account the not brilliant scenario we have in mind in terms of global demand, EM exports and oil, GEM EPS is expected to decelerate further; our internal forecasts for 2019 are low single digit (+5%) and below IBES consensus (that is close to +12%). The cycle is mature and favours quality and dividend yield. Asia – China, the Philippines, Indonesia and, to some extent, India – show a good combination of supportive fundamentals, valuations and macroeconomic solidity. Indonesia’s external vulnerability is expected to remain a bit worrying. India, Indonesia and the Philippines should benefit also from lower oil prices. In Latam, Brazil and Peru are attractive. In Brazil’s case, fundamentals improved in terms of valuations, expected profitability and dividends but big uncertainties remain on the elections and on the reform agenda that will be implemented by the new leader. What to Watch
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GEM not so cheap vs. World considering the expected earnings growth gap. 
Country Selection Paramount in EM Equity Equity Score based on fundamentals and valuations meet Macro Momentum 
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Emerging Market Bonds (Hard Currency) – Selective OpportunitiesHigh Conviction Ideas
What to Watch
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Valuations looks marginally negative on EMBI Index. EMBI Spread is expected to widen further by around 20bps from current levels (around 390bps) 
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Sticky flows |
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Flows Outflows have been limited until now in 2018
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Emerging Market Bonds (Local Currency) – Sell-off pressure to persistHigh Conviction IdeasEconomic Backdrop
Real rates are expected to increase in 2019, remaining slightly lower than the post tapering average. EM central banks are in a tightening mood. We expect that inflation will remain almost always inside the central banks’ target range.
EM real rates offer attractive pick-up: real yield differential between EM and DM is very high. However liquidity momentum is less favourable to risky assets. The attractiveness in terms of valuation is balanced, on the negative side, by GBI aggregated EM FX expectations that confirm the overvaluation on 12 months horizon
Flows remained sticky during 2018 but have been showing some weakening signals in recent weeks. The negative sentiment vs. emerging markets has until now hit mainly EM FX and to a lesser extent equity. Some contagion effects to bonds can happen due to the headwinds on the asset class (tariffs, politics, idiosyncratic stories, US rate hikes, strong USD). As idiosyncratic country risks have risen. External vulnerability has to be strictly monitored. What to Watch
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EM Real Rates (GBI-weighted): Still attractive ‘carry’ 
EMFX Valuation (GBI-weighted): Overvalued, negative for LC Bonds 
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EM Currencies – Important to be selectiveHigh Conviction Ideas
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EMFX Outlook: Preference for high-carry with low volatility, less externally vulnerable and under/fairly valued Currencies.
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Commodities – All in all, global conditions still supportiveHigh Conviction Ideas
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OPEC production/capacity ratio is at its highest level since 2008 
Inventories cycle moved is neutral zone recently 
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Commodities are still relatively cheap despite their recent rally |
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Cross Asset - Navigating a mature financial cycleHigh Conviction Ideas
What to Watch
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Advanced Investment Phazer Points to a late cycle financial phase, which is usually good for equities, as long as the (EPS) cycle is intact. 
Fair Value vs Mature cycle average returns There is still room to extend returns 
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Q4 2018 Cross Asset Assessment (model driven) |
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