Active risk management: key success factor in 2017

Transcription

1 Intended for professional clients as defined by the MiFID directive Active risk management: key success factor in 2017 Transitioning to 2017 After a 6-month phase of global investors perception switching from quality investing towards value and cyclical themes, the end of 2016 brought a calmer tone on both equity and fixed-income markets of developed countries - at least in the short term. This wait-and-see attitude is likely to be attributed to the year-end lowactivity period, but given the amount of high - economic and political - uncertainty ahead, the idea is to figure out whether the current period is just a pause in the cyclical rally, or if we are now entering a reality-check phase in which macro-economic data needs to confirm what market participants have come to expect (higher inflation, more deregulation, more job creation in the US and Japan, higher inflation and economic growth in the Euro-zone). Over 2016, investors have been tossed back and forth between the risk of recession/deflation, and the hopes for a more sustainable recovery. Political deadlines set the pace in 2016, frequently reaching an outcome that was contrary to expectations, both in terms of electoral result and ensuing market reaction should display similar patterns, bringing its new share of political uncertainties and questions on overall macroeconomic dynamics; except that some parameters are clearer: - Investors have become more pessimistic about assessing the political context, although more complacent over their market impact; - Today s hope for global economic growth is as high as was the level of fear this time last year. Since beginning of 2017, global growth is on the rise: as the US economy approaches full employment, the rise in the US Dollar and the adjustment of oil prices have allowed for growth to spread from the US over to Europe. Meanwhile, Chinese authorities managed to control the landing of their economy by fostering public loans and support to the real estate sector. But the main change is obviously the arrival of Donald Trump and his particularly target-oriented program: resort to massive leverage (i.e. increased budget deficit, infrastructure spending), restructuring (i.e. massive deregulation) and branding (protectionism). We have no reason today to believe that his message will be smoothed in the foreseeable future, despite possible legal setbacks against his initiatives. These "Trumponomics" should further drive markets for a while and, wherever deemed necessary, the new President could rely on populism to take controversial measures. Simultaneously, we foresee a reflux of the political risk in Europe. The aftermath of the Brexit and the election of Donald Trump could actually promote a rejection of the populist temptation. As monetary policies start showing their limits and major Central Banks adjust their strategies, the transition to a more balanced and growth-friendly policy mix seems to be emerging: thus, the start of 2017 should bear

2 witness to further cyclical improvement and rotation towards growth-sensitive asset classes, a trend that has been ongoing for the past few weeks. Further down the road though, the key to a more sustainable recovery will come from the investment side. To confirm its upward trend, not only must President Trump s campaign promises be enacted (especially on the fiscal and budget side rather than potential customs taxes...), but they also must be followed by some form of coordination - or convergence - on a more global scale. Indeed, without a growth relay in Europe (where governments could turn more lenient to stem the rise of populism) and Japan (where the BoJ's ultra-aggressive monetary policy clearly failed to boost inflation), the hopes that were born with the new President s promises could grow unfulfilled. How to approach asset allocation Just like in 2016, and given that the outlook for the global economy should navigate between reflation and "secular stagnation", the timing of allocation choices will be paramount. Large-scale movements should pace markets this year again, reflecting both political and economic uncertainties. Active risk management will therefore remain necessary to limit the impact of possible jolts and to seize opportunities wherever possible. At the beginning of the year, so long as cyclical dynamics remain on a favorable path, the upswing in government bond yields is expected to persist, and the US Dollar should remain strong. It thus seems coherent to focus on developed equity markets, especially in Europe and Japan. Financial and cyclical sectors should further benefit from improved fundamentals and from the steepening of yield curves. Finally, Emerging markets require a more cautious approach, given rising rates, strong US Dollar, and political risk. Market movers and shakers will come from the US first, with the first measures presented to the congress. Afterwards, all eyes will be on Europe with the launch of Brexit negotiations and the general elections in the Netherlands, in France in spring, and in Germany in autumn. Only after all these pitfalls have been passed can we envisage a real catching-up in the Eurozone. Beyond these political steps (which will undoubtedly influence investors) and the natural volatility of the economic cycle, it will be important to keep an eye on investors consensus positioning. Any element likely to call into question these current dynamics could have a significant (if maybe exaggerated) market impact, causing sudden and temporary turnarounds. Without calling into question the current trend favoring a reflation of the world economy (which must quickly translate into real data nonetheless), it won t be a walk in the park. Market volatility will therefore have to be actively managed by maintaining flexibility to adopt contradictory positions as trends shift. A rise in sensitivity to government bonds, a revised positioning towards the US Dollar, a return to more defensive sectors, or even a reduction in equity exposure will have to be considered to handle portfolio risk and limit the impact of market movements on the valuation of investments. and efficiently manage risk? Following a gradual rise since mid-2014, equity market volatility tends to soften. Aggressive monetary policies are no longer responsible for compressed volatility, but it s rather hopes for a changing economic trajectory. This decline in risk aversion should go on as long as actual data supports this inflection. But the withdrawal -

3 relative and very gradual - of Central Banks away from market focus and the political shakeup in the US both signal the dawn of a new environment with a wider spectrum of structural views and anticipations levels. As a result, we may gradually emerge from a very low volatility regime ridden with sharp and violent upward movements, towards equity markets with higher volatility levels on average; but where downturn phases wouldn t come with a panic movement as we ve experienced lately. However, there is a widespread misconception amongst market participants that increased volatility level alone - is a reliable indicator of market downturns. While the 2008 crisis has seen volatility spike at an all-time high, 2016, with its multiple volatility short spikes, proved that the volatility level, as an indicator of market stress, is not always perfect. Sadly though, a lesser focus is given to another great risk factor that completes the volatility analysis: correlations. Correlations between asset classes tend to increase in times of market stress, so managing volatility also requires understanding the dynamics of correlations affecting a portfolio over time: these have been on a rising trend over the past 30 years, and at an all-time high in Europe in the past couple of years with no major structural crisis! To actively manage portfolio risk and volatility is therefore a tricky endeavor, given that diversification is ever harder to achieve. Our active Minimum Variance funds will for example calibrate their fund beta so that it minimizes the volatility of the fund versus the broader market, by selecting the least volatile and correlated stocks amongst the investment universe. Our multi-asset funds can control volatility by dynamically allocating their investments according to risk/reward scenarios on each individual asset class, and to avoid correlations traps in periods of crisis. Finally, it is possible to directly invest in equity volatility, given the availability of a liquid market (VIX); the benefit of such investment is to diversify an allocation and generate additional source of returns, uncorrelated from traditional equity and bond investments. As markets are bound to experience volatility shocks at a higher frequency given the multiplicity of world shaping events in the year ahead, generating returns and minimizing volatility will require active diversification and allocation to strategies that put risk first, to minimize the impact of volatility on global allocations and ensure long term growth. Written on February 16, 2017

4 About Seeyond Seeyond is the volatility management and structured product investment division of Natixis Asset Management. In order to turn uncertainty into opportunity, Seeyond develops a complete range of funds in three areas of expertise: structured and active protected management, flexible asset allocation and active volatility management, model-driven global and European equity strategies. The portfolio management team is daily supported by a quantitative research platform. With 33 employees, Seeyond has 14.7 billion in assets under management as of 31/12/2016. Seeyond s fund range is distributed by Natixis Global Asset Management s global distribution platform and Groupe BPCE s two retail networks, Banque Populaire and Caisse d Epargne, and is designed for all types of investors, both professional and non-professional. > Further information: > Follow Seeyond on Natixis Asset Management ranks among the leading European asset managers 1 with more than 360 billion in assets under management and 697 employees 2. Natixis Asset Management offers its clients solutions organized into five investment divisions: Fixed income, European equities, Investment and client solutions, Volatility and structured products developed by Seeyond and Emerging equities developed by Emerise. Natixis Asset Management owns also three subsidiaries asset managers: Mirova, Dorval Asset Management and H2O Asset Management. > Further information : > Follow Natixis Asset Management on 1 Source: IPE Top 400 Asset Managers 2016 ranked Natixis Asset Management as the 49 th largest asset manager based on global assets under management and by the country of the main headquarters and/or main European domicile, as of 31 December Source: Natixis Asset Management 31/12/2016. Seeyond is a brand of Natixis Asset Management. Emerise is a brand of Natixis Asset Management and Natixis Asset Management Asia Limited. Mirova is a wholly-owned subsidiary of Natixis Asset Management. Dorval Asset Management is a 50,1 % subsidiary of Natixis Asset Management. H2O Asset Management is a 50,01 % subsidiary of Natixis Asset Management.

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