Macroeconomic scenario
The update of our 2013-2014 scenario continues along the themes of last January, that is to say a gradual worldwide recovery: 3% in 2013, and growth now down from 4% to 3.5% in 2014, for two main reasons. Firstly, we are still predicting growth in the United States, but at a more moderate rate in 2014, as we had anticipated previously. Secondly, we are revising Chinese growth for 2013, as a result of the debt situation and the change in the Chinese growth model. However, the growth prospects for the eurozone remain unchanged.
So how have we constructed this scenario and what themes is it based on? There are three main themes: deep structural changes, the stabilisation of the eurozone and global economic policies. The first pillar – structural changes – includes the continued reduction in debt, the change in direction of the growth model for emerging countries, and the ageing world population.
As regards the second pillar – the future of the eurozone and its stabilisation – it must be said that very little has changed over the last six months. There has been very little institutional progress (e.g. banking union) and very few structural reforms in the eurozone countries. The rate of debt reduction – both private and public – has also not advanced much.
Lastly, as regards the third pillar – global economic policies – budgetary policy has become much less restrictive, including in Europe where budget adjustments have been put back and monetary policies all over the world remain very accommodative.
Economic policy
The third pillar on which our economic scenario is based – economic policy - has been, is and will remain a key element in the development of financial markets. We expect good news from this quarter, although it will not always be an easy road.
Starting with the good news, we expect economic policies that will sustain growth. Firstly, from the point of view of monetary policy, the central banks will remain accommodative in the long term, probably for longer than we expect, for three reasons. First, our economic scenario is less positive than that of the market or even that of the central banks. Secondly, the central banks themselves have told us that they will not take any risks with the economic recovery. Thirdly, maintaining low interest rates encourages public debt reduction. Monetary policies are therefore accommodative in the long term. As for fiscal policies, there is also a collective awareness that these policies need to be less aggressive, less restrictive and smoother over time, which will inevitably boost growth.
However, it will not always be an easy road, particularly in terms of our understanding of monetary policies, as here the market must re-learn to read the central banks, whose reaction functions are much more complex than before. These days, in addition to macroeconomic stability - growth and inflation - they have added financial stability and some have added State funding to their reaction functions. Things are therefore more complicated, and the markets are in a learning process, which will necessarily increase volatility.
The interest rate and credit markets
The interest rate markets are in the hands of the central banks. We still expect support from the central banks, with accommodative or even very accommodative monetary policies, particularly from the European Central Bank and the Bank of Japan. The FED, meanwhile, will control the extent of its liquidity injections. The interest rate markets must now learn, therefore, to live with the idea that liquidity injections from the US Federal Reserve are not infinite, which creates an enormous amount of volatility and results in exacerbated movements on current rates.
Our opinion is that rates will rise, although gradually, accompanied by an improving trend in the US economy. This improvement will lead to a rise in rates in the eurozone to a lesser extent, the US market resuming its role as the lead market.
In the eurozone, we still expect stabilisation, therefore a continued standardisation of risk premiums in the peripheral countries, owing more to a rise in the rates of core countries than to a lowering of the rates in peripheral countries.
Our view of the credit market remains a constructive one. The share of risk premiums in the total returns of private issuers is still predominant, and covers the risk of default. However, this class of assets is vulnerable to an abrupt rise in rates, which is what it is experiencing at the moment, but our scenario of gradual rate rises means that this is still an interesting asset class.
The equity markets
Despite recent volatility, the scenario for equity market is still highly favourable. Although growth is slow, and corporate profits are very dependent on worldwide growth, which is dragging its heels, valuations are highly attractive, particularly in comparison to other asset classes. The risk premium in the equity markets, which has been extreme in recent years, should continue to come down. We therefore have a positive long-term outlook on the equity markets, in all geographical zones, and in the short-term as well, although it is likely there will be a lot of volatility. This is due to the shift from an environment where central banks are highly protective to an environment where we will have to rely on economic growth, and therefore corporate results - which is normal and also favourable to equities. The transition from one to the other is new and uncertain, and will therefore lead to considerable volatility on the markets. Our sector allocation reflects this shift, which will take a long time to be completed; we will no longer be in a completely protected, highly defensive environment, and we will not yet be in a completely cyclical environment. We will therefore avoid extremes, avoid highly defensive stocks which are very costly, and highly cyclical stocks which are too early and too risky - we are between the two extremes, and we will make our pick from the best in the middle.
