The markets are not going on vacation, but are awaiting an important September on several fronts. The theme of central banks has never ceased to be dominant, but it is particularly so in this phase of normalization of monetary policies. During the month of June, there was talk of how the loss of momentum in macro data, both on the growth and inflation side, and the dovish rhetoric of central banks had fueled a drop in rates.
In July, the situation completely changed: the watershed with respect to the previous situation can be identified in the forum organized by the ECB on 26 June in Sintra, Portugal, which provided important insights for the markets. Indeed, within a couple of weeks, the yield on the 10-year Bund increased by about 30 basis points and today it is moving between 0,50-0,60.
During this summit, the president of the ECB Mario Draghi provided a much less prudential picture than that expected and discounted by the markets, in particular bond markets. According to the governor of the European central institute, the risks of deflation have substantially disappeared, we are in a reflationary context and the weakness of the inflation data is of a transitory nature.
A more restrictive message, therefore, compared to what the markets were pricing, especially as Draghi's words were placed in the context of other similar statements by other central bankers, such as the governor of the BoE, Mark Carney. All of this has produced a rise in bond yields. The key message, therefore, is this: we are in a reflationary phase, inflation is bound to return and, even if central banks will be cautious and gradual, the path is that of a normalization of monetary policies.
This has a very significant value in the euro area, given that it is a recent message. In the United States, however, the Fed has already embarked on this path for some time. As for US President Donald Trump, the attempt to reform Obama's health care reform has failed. It is yet another demonstration of the distance between Trump and the Republican party. The most important consequences will concern the timing of the tax reform. Congress can now concentrate on this issue: tax reform comes to the fore and no longer has to follow that of health care reform temporally and conceptually.
The second consequence concerns the political climate, which has become more tense: the risk of some hiccups is growing, such as some protectionist measures or the exploitation of the delicate appointments in September. In that month there will be a new budget to be approved, to address the issue of the American public debt limit, which must be raised by a vote in Congress. Trump could use these appointments to force his hand with the Republican party, reuniting it and increasing internal discipline.
In this context, from a strategic point of view, ANIMA's view has not changed. We maintain a cautious, or negative, view on rates and, therefore, on the bond component, especially core; the opinion on risky asset classes remains positive, especially equities. The reasons for this are given by a solid macro environment and growing corporate earnings. However, the end of summer could be a phase in which to see a correction on the markets, essentially for these reasons: some asset classes have recorded very positive performances and valuations are no longer so cheap, with very low volatility it may take little to cause a correction on the indices.
Given this caveat, the strategic view on equity remains intact and positive. If so, this would be an opportunity to purchase or increase equity positions. In the bond space, we maintain a moderately positive view on the higher spread segments, therefore emerging and high yield.
BOND MARKETS AND CURRENCIES – Caution prevails
With regards to the bond market as a whole, we continue to advise caution. Our view is negative, especially on government bonds with higher credit ratings. To date, 26% of global government bonds have a negative yield, while only 1% have a yield above 3%. These statistics become even more unforgiving when it comes to Europe. In our view, it becomes very difficult to find value at these levels. For the same reasons, the view is also negative on corporate and investment grade bonds. On the other hand, a moderately positive view on emerging markets and high yield. On the currency front, we maintain a
constructive judgment on the euro, especially in relation to the dollar.
The direction of the ECB's monetary policy and the strength of the Eurozone economy are the two engines behind this positive vision. Strategically, or in any case with a time horizon between now and the end of the year, we are convinced that there is further room for
appreciation of the euro against the dollar (Graph 3) and the threshold of 1,20 could be reached or approached. Negative view, however, on the pound.
EQUITY MARKETS – Europe: solid data and contained volatility
The view on the European equity market remains constructive. In recent weeks, the asset class has shown a sideways trend, characterized by lower volatility than in the first half of the year. We remain positive in the short term, thanks to global growth that remains strong and the good macroeconomic data published by European countries and emerging countries (especially China). September will be an important month for the fate of equity markets, with scheduled meetings of the European Central Bank and the Fed.
We expect Draghi to announce a reduction in the monthly amount of bond purchases starting at the start of the new year. However, the interest rate normalization process will be carefully monitored by the central banks and will be implemented, in the coming years, with moderate measures so as not to impact the equity and bond markets too aggressively. From a sectors perspective, we are positive on IT, consumer discretionary, banking and construction. The view on industrialists is neutral, negative on energy.
Italy: signs of improvement
The equity markets of the Eurozone, and of Italy, continue to benefit from the improvement in the economic situation. Analysts expect GDP growth of 1,9% for the Eurozone (it was 1,3% at the beginning of the year) and 1,2% for Italy (it was 0,8% at the beginning of the year) . In recent weeks, however, the progressive appreciation of the euro against the main currencies has led to modest downward revisions of earnings growth estimates (clearly concentrated on sectors/stocks most exposed to international demand).
For the Italian market, in relation to the banking sector, it is worth mentioning the intervention of the State which made it possible to resolve the most critical situations, guaranteeing the stability of the system and the significant reduction of systemic risk. On the other hand, the political context appears extremely uncertain and the difficulties of undertaking a virtuous path of reform and reduction of the public debt remain evident. On the domestic growth front, we are confident that the gradual recovery of GDP can continue: the recovery appears rather structural and supported by all the main components: domestic consumption, investments (especially machinery) and exports.
Some elements lead us to justify an always constructive attitude: macro data which confirm the gradual recovery path of the GDP; Eurozone exit strengthened by the election of Macron in the French presidential elections (a stronger Eurozone has positive implications for the Italian market); the banking sector, despite the unsolved problem of the disposal of non-performing loans, seems to have overcome the most acute moment of the crisis and the most critical situations appear to have been resolved, also with the intervention of the State.
Emerging stock exchanges: positive signals
The view and prospects for this area remain good for several reasons. The first is the strength of the macro picture in China. Fears about a restrictive Chinese central bank have proved unfounded and until October November, when some key Party posts are due for renewals, we expect the data to continue to be good. Another support factor is the dollar: as long as the US currency remains weak and rates do not rise, the scenario can be considered favorable for emerging markets, which are enjoying earnings growth of more than 15% y/y. Although it is true that this area represents the best equity market since the beginning of the year (+16%), we believe that there may still be room for growth.
Asian stock exchanges: opinion remains constructive
The opinion on these stock exchanges remains positive and we expect the appreciation trend to continue in the medium term. Asian companies, at a fundamental level, performed very well, while at a sector level, energy, technology and financials recorded the most positive surprises. Revisions to earnings expectations continue to have a positive trend, with cyclical sectors favored over defensive ones (financials and energy in particular). China continues to drive this upward revision: solid growth expectations, better-than-expected PMIs, improving margins and cash generation drove 2017 earnings expectations up 1,3% in the first quarter.
The signals are positive in Japan too, especially after the annual meetings which demonstrated how the reforms of the stewardship code can be considered serious and the Japanese stock market can really benefit from this trend.
