2014 Scenarios

{Marie-Pierre Peillon, Research Director} 2014 Scenario Our 2014 scenarios tie in with a period of transition between cyclical recovery and structural adjustments. The first point is that although 2014 will see a cyclical upturn, structural adjustments –such as public and private deleveraging, implementation of structural reforms, and of new governance in the eurozone via the banking union – will continue and will have a long-term impact on growth. Secondly, the United States will be the engine of global growth because all its indicators are positive: fewer budget constraints than in 2013, an investment upturn, and above all a rise in consumer spending due to the improved job situation but also the much-discussed wealth effect. The third point in our scenario concerns the eurozone where recovery is still slow and driven by countries outside the zone The eurozone is still constrained by the implementation of its structural adjustments. Deflation risk, in our view, does not present a threat provided that lower inflation does not affect inflation expectations. Finally, two key points regarding the emerging countries. First, the continued slowdown in growth due to a less favourable international context and to the structural adjustments these countries must undertake. Second, the considerable and increasingly apparent heterogeneity in the region. A quick word on China: growth is cooling but is being rebalanced. Given this moderate growth and the vulnerable context, monetary policies should remain highly accommodative. In summary, our economic scenario for 2014 points to stronger economic growth, rising from 2.9% in 2013 to 3.4% in 2014, thanks to a stronger US economy and ongoing monetary policy support. {Gaëlle Malléjac, Head of Fixed Income Management} The fixed-income Our interest rate scenario for 2014 is based on three main themes: stronger growth in developed countries, continued support expected from the central banks, and greater stability in the eurozone with the establishment of the banking union. As regards stronger growth – which is mostly expected in the United States – it will encourage interest rates to rise on both sides of the Atlantic. However, we expect the rise to be moderate for two reasons: firstly, because inflation will remain low; and secondly, because the central banks are committed to keeping interest rate rises moderate. Regarding German interest rates specifically, they are expected to rise less than US interest rates because of the structural challenges hampering growth in the region. Finally, continued stabilising of the eurozone – thanks to the establishment of the banking union – will lead to interest rate convergence in the Eurozone. Risk premiums in peripheral countries will therefore continue to fall and this trend towards convergence will be mostly due to a rise in interest rates in core countries. The credit market The environment remains favourable to the credit market both from a fundamental and technical point of view. In fundamental terms, credit spreads should continue to benefit from a context of economic recovery where low inflation will prevent interest rate hikes. Furthermore, companies and their fundamentals are satisfactory and solid. The asset class also benefits from strong technical support. This year will see historically high levels of reimbursement. Furthermore, liquidity remains ample and the search for yield is still ongoing. {Claire Chaves d’Oliveira, Head of Equity Management} The equity market 2014 is going to be different than 2013. Briefly, what happened in 2013? In 2013, everything came down to what we call risk premium. In other words, the extreme risk aversion we could still see at the end of 2012 changed to strong risk appetite. This factor alone accounts for the upsurge in the markets – the fact that investors were no longer scared of the stock markets, in particular the European stock markets which had become investable again. The rise had nothing to do with perceived forecasts of better results. Indeed, throughout 2013 results continuously worsened and were revised downwards, which is something of a paradox. In 2014, however, things should follow a normal course. 2014 should finally be a normal year: it should rely on growth in corporate results. We have revised growth in corporate results upwards due to the US economy exceeding the growth we had forecast several months ago. We have also revised European growth upwards. This allows us to raise our results forecast to 7%, which is a minimum given that we could also see corporate margins improve strongly, and European corporate margins are far off their all-time highs. So there is still plenty of potential. The same applies to the United States. They are also benefitting from world growth, but above all from domestic growth and from a very dynamic country. Therefore, we expect a minimum growth in results of 9%. Similarly, this does not take into account potential margin increases; in the US, however, margins are higher. So overall, what do we end up with? Our view is that the stock market will at the very least develop in line with corporate results, roughly between 7% and 9% in all geographic areas. Therefore, our outlook for all stock markets is positive.