Stronger momentum for the Euro Area with a credible ECB that will maintain its QE

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1 CONVICTIONS Conclusions of Natixis Asset Management monthly investment committee May 2015 MACROECONOMIC ANALYSIS Stronger momentum for the Euro Area with a credible ECB that will maintain its QE Analysis of the markets environment & core scenario GLOBAL MULTI-ASSET ALLOCATION Despite the yield curve steepening, we maintain an overweight on equities in Japan, euro area and US Strategic and tactical analysis and allocation Focus on FIXED INCOME The sharp rebound in bond yields relates to a rise in the term premium rather than a change in expected policy rates. The resulting yield curve steepening had little impact on most spreads. EUROPEAN EQUITIES We are neutral on the European equities for the short term due to the potential negative impact on the Euro zone of both the economic situation in Greece and the political steps post elections in UK. GLOBAL EMERGING EQUITIES Despite their outperformance in April and year-to-date, we maintain our Neutral stance on EM equities as we fail to justify this performance out of fundamental factors.

2 MACROECONOMIC ANALYSIS Economic research Since the beginning of the year, growth accelerated in Europe, particularly within the Eurozone. However the slowdown is sensitive to the USA and China. Thus the overall dynamic remains deteriorated. That will not be reversed spontaneously in China despite the activism of monetary and fiscal authorities. In the US, the model wears off and once again raises the issue related to the Fed's monetary policy and the moment of the lift-off in interest rates. If growth is permanently reduced then the Fed could concentrate on the dollar rather than interest rates. Core macro scenario World Economy PMI/Markit and ISM Surveys The American Economy The US economy slowed sharply in the first quarter with an increase of only 0.2% of its GDP (annualized). The first data available for Q2 suggest no rebound in the economic activity at least not in the proportions observed last year. Retail sales are slowly changing and the last 3 months industrial production declined significantly. The Fed could be tempted to weigh on the greenback to restore competitiveness to the US economy. The Chinese Economy The Chinese economy has continued to slow in April. The first quarter growth was very low (5.3% in the quarter compared to Q annualized); investment and household spending in April continued to soften. The authorities try to reduce the brutality of adjustment but can not now reverse the downward momentum. The central bank has started to reduce its rates and the government take measures on local public debt. Indices of the manufacturing sector fell sharply. The United States and the United Kingdom which were the two spearheads of the industrialized countries see their activity wane. The Japanese index fell below the threshold of 50 in April and the index of the Euro zone has just stabilized. The world index back a little and BRIC index has fallen below 50 Emerging Countries' surveys Euro Area economy The developments observed in the first quarter may suggest that the economy of the Eurozone is emerging from its long period of stagnation. First quarter growth figures go in this direction. The Spanish economy has accelerated sharply, France has grown faster than expected and Italy has finally emerged from its long recession. The dynamics as described by France and Germany suggests that it is domestic demand that has gained consistency. It shows the effect of a lower oil prices and the first impacts of the policy conducted by the ECB... The chart reflects the current economic fragility. The two synthetic indices of BRIC and all emerging fell below the threshold of 50. With the exception of India's index other three BRIC countries are declining and Brazil shows a real weakness. This implies a likely slowdown in global trade in the coming months.

3 Indicators Growth and inflation Avergage growth Average Inflation USA Japan Euro Area U.Kingdom China France Key interest rates Source : Economic research / Natixis AM Year end Monetary Policy Long Term Interest Rates (10 year) USA Japan Euro Area U.Kingdom Source : Economic research / Natixis AM Focus Monetary policies Inflation is still not there but the ECB has meant that probably the low point of inflation expectations was hit at the beginning of 2015 when the oil price was very low. If energy prices causes volatility in the inflation rate, the internal components have a low momentum. For the Eurozone, the April figure is at its lowest. The assumption on the inflation profile will reflect expectations of energy prices. I remain convinced that this price is currently excessive in relation to the dynamics of production. In light of recent macroeconomic developments and due to inflation remaining low, there is no reason to see central banks rushing to raise their interest rates. The situation is too uncertain in the US, including real estate, to change its strategy rapidly (since the 3rd quarter of 2013, residential investment has stalled). For the ECB, monetary policy operations will stop in September 2016 at best if inflation expectations converge to 2%. If this is not the case, the ECB will continue. The important point for the success of the operation is that investors are convinced that the ECB will not stop its program. Mario Draghi has hammered this point and will stick to it, in order to preserve the ECB credibility.

4 GLOBAL MULTI-ASSET ALLOCATION Investment and client solutions investment division We remain overweight equities, but we diversify this position by resuming an overweight on US equities, in addition to our long positions on Euroland and Japanese equities. Theoretical model portfolio The views used as input for the model portfolio are consistent with specialist s ones but may lead to different relative weighting versus benchmark compared to single asset class model portfolios.

5 Core scenario for global allocation Fixed income A significant correction on European bond leading to a steepening of the yield curve. The 10y German yields went from a floor of 0.05% in April to 0.55%, in a few sessions. Of course the absolute level remains low, but the increase was brutal. Volatility on the peripheral debt rates is fueled by difficult negotiations between Greece and the Eurogroup: the 10y Italian yields evolves between 88 bps vs Bund and 140bps since March 16, being between 1.15% and 1.48%. The main risk lies in an excessive rise of inflation expectations as a result of a recovery in commodity prices, and especially for oil. Global cycle World: manufacturing PMI index Global manuf. PMI Source: Markit, Bloomberg PMI surveys confirm the global slowdown Equities After an exceptional first quarter, the Eurozone markets suffered from a more difficult month in April. The doubts related to the negotiations on Greek debt and, above all, the strong tensions on the bond markets have brought back the Euro Stoxx index in a slightly negative territory throughout the month, with an increase in volatility. We remain positive on euro area equities; however we diversified our allocation: we reallocated a part of the first quarter earnings on Japan, emerging Asia and the United States. Currencies The /$ rebounded to $ 1.12, partly explained by a slowdown in the US, suggesting a pushback of Fed rate hikes. Commodities Financial markets 10-year government bond yields Source: Bloomberg Germany US The spike in bond yields stems from a repricing of the term premium, not from hawkish monetary expectations. Despite record levels of production and new macroeconomic disappointments, oil is up 21% in April ($ 67). Rising demand, falling investment, tensions in the Middle East but also the drop of the dollar and the Chinese monetary easing have led to a rapid normalization of speculative short positions.

6 FIXED INCOME Fixed income investment division The sharp rebound in bond yields relates to a rise in the term premium rather than a change in expected policy rates. The resulting yield curve steepening had little impact on most spreads. Market analyses & outlook Bund have underwent a significant correction which erased a large part of bond returns yearto-date. Heavy net bond issuance in sovereign markets and speculative selling via futures have magnified the sell-off. Contrary to the taper tantrum in spring 2013, the yield increase is not associated to a shift in policy. The bulk of the bond market sell-off is a steepening in the real yield curve. It also reflects a normalization in valuation of the risk-free rate from rich levels. Our fair value estimate is 0.54% on 10y German yields. The market has hence overshot fair value but looks to be stabilizing some 10bps above that level. Inflation expectations have moved little despite a significant bounce in oil prices. In the US, short investor positioning has contributed to a moderate yield increase and thus a narrowing in UST spreads. That said, the market is currently pricing in a very low probability for a June liftoff. The steepening trend in US curve (2y-10y) could reverse course if incoming data confirms a pickup in activity after a disappointing first quarter. The rate correction did not trigger a significant rise in spreads. In sovereign space, core spreads are unchanged thanks to insurers and other final investors buying into more attractive yields. Peripheral bonds have been volatile but we maintain our positions. We keep our constructive stance on credit, covered bonds and peripheral sovereigns. Our positions MEDIUM AND LONG TERM INTEREST RATES We keep our overexposure on peripheral debts. The level of yields, for theses countries, versus German yields, is not at the tightest spread and the ECB QE should result in a further convergence. This effect can take some time to come because, as of today, the ECB has been able to limit their impact. It is mostly the success of the negociations between Greece and the Troïka which should allow these debts to outperform. MONEY MARKET RATES At its 15th April meeting the ECB left its director rates unchanged again: "refi" rate at 0.05%, marginal lending facility rate at 0.30% and deposit facility rate at -0.20%. Mr. Draghi declared that the measures (QE) put in place by the institution were "efficient" and reaffirmed its will to bring them "fully" to fruition despite first signs of a smooth recovery of inflation in the Eurozone. Although the bond and stock markets of the Euro-zone did record a violent correction on month end, money markets returns and credit spreads decreased again. So Eonia average for April fixed at -7.5bps compared to -5bps in march. In this context, our fixed and variable rate allocation target for "tactical" funds is now at 90%/10%. Portfolio diversification in corporates securities is still a major topic.

7 Sovereign portfolio OVERVIEW 04/ /2015 Duration - Euro: -- Long - Euro: -- Long Yield curve - flattening - flattening Indexed bonds Country selection - Real euro interest rates: Neutral - Real euro interest rates: Neutral core Overweight Overweight As a diversification to our investments in sovereign and IG corporate debts, we remain invested in High Yield and Convertible bonds. semi-core Overweight Overweight peripherals Overweight Overweight CREDIT Credit markets have deteriorated in the wake of the sell-off on government bonds. The average spread of the Barclays Euro Aggregate Corporate index has widened by 4bp, from 62bp to 66bp, back to the levels of early in the year. We however maintain a positive view on the credit asset class on account of its intrinsic valuation and its attractiveness in terms of carry. View 04/ 2015* 06/ 2015* Two month credit view Sector view (IG) 04/ 2015* 06/ 2015* Covered** + + Cyclicals = = ABS + + Defensives = = Corporate High Yield Corporate Investment Grade + + Financials Banking (Subordinated) + + Banking (Senior) + + Convertibles +/+ +/+ Insurance + + Convertibles: Our positive view remains strong in a medium-term vision. In the short term we do not exclude the volatility given the rapid upward movement since the beginning of the year. Flows remain strong for the asset class and support valuations. The volatility has increased and now is fair value. For now, the weakness on primary market argues for strong valuations. We retain a higher delta exposure than the benchmark around 10bp. High Yield: We stay positive on high yield market. The recent rise in volatility and interest rates has illustrated the relative resistance of this market and its low correlation to rates despite tight spread levels. This market should continue to benefit from sound fundamentals from corporate side, from investor appetite for an asset class still offering a higher yield.

8 janv.-13 mars-13 mai-13 juil.-13 sept.-13 nov.-13 janv.-14 mars-14 mai-14 juil.-14 sept.-14 nov.-14 janv.-15 mars-15 GLOBAL EMERGING Developed fixed income markets are still driving the EM asset class but TAUX EMERGENTS Market analyses & Outlook The external debt returned 1.6% this month (+3.7% ytd), this time supported by oil and commodity linked sovereign issuers. US yields rose modestly (from 1.92% to 2.03% for the 10y yields) while the US dollar halted its appreciating trend : the consensus over a Fed first rate hike in Q continued to grow, despite lackluster macroeconomic data. This scenario supported risky markets and oil prices continued to recover, mainly due to a weaker dollar over the month. It helped local emerging debt to recover some of it losses, with a monthly performance of 2.9% (-1.2% ytd). Inflows into fixed income emerging bond funds also improved, showing resilience to US bonds volatility. But emerging markets also benefited from better news on specific and important issues : Petroleos Brasiliero (Petrobras) finally published audited accounts for the 2014 and thus removed fears of triggering covenants. Wide valuation helped this credit to outperform this month and also supported the Brazilian debt which returned 2.1% (external debt) and 8.0% (local debt). Meanwhile in Russia, despite its very fragile equilibrium, the Minsk II agreement continued to hold and the rouble strengthened again, thanks to oil naturally but also descent local buying (the current account balance continued to register surpluses despite the crisis and the oil price drop). Spread thus tightened 28 bp to 340 bp, back to their December 2014 levels and still above their last 2 years average of 322 bp. Our positions CORE SCENARIO The last FOMC announcement reinforced the view that developed bond yields are likely to remain low, although US bonds could see moderate upward pressures. Risk sentiment should stay supportive for spread products. We continue to overweight some high yielders even if we know we will have to stomach volatility in the short run. US debt performance versus EM international and local debt EM external debt UST EM local debt Main related risks A sharp and prolonged sell off of commodities leading to further heterogeneity among EM universe and a much stronger US Dollar.

9 EUROPEAN EQUITIES European equities investment division We are neutral on the European equities for the short term due to the potential negative impact on the Euro zone of both the economic situation in Greece and the political steps post elections in UK. Market analyses & outlook MSCI Europe Small Caps DNR / MSCI Europe DNR EURO STOXX 50 / S & P 500 implicit volatility Our positions Source: Bloomberg Source: Bloomberg CORE SCENARIO Due to a negative momentum on the macro economic environment in the US, uncertainties on the economic situation in Greece and political decisions in the UK, we remain neutral on the European equities despite a positive trend on eps growth. In terms of sector allocation we overweight the Discretionary consumption (Automative industry, Media, Luxury goods), Healthcare, Telecommunications (because of the dividend yield and the sector consolidation), Software and IT Services. We are neutral on Energy, Materials, Consumer staples. In the financial sector we adopt a slight positive bias on Banks and negative on Insurance, and Real Estate. We are cautious on Capital Goods (USD exposure), and IT Hardware and semi-conductors and we underweight Utilities. We favor Europe ex Euro. Main related risks Economic situation in Greece Political decisions in the UK Monetary policies in Europe and in the US. Euro / USD currency rate

10 GLOBAL EMERGING EQUITIES Despite their outperformance in April and year-to-date, we maintain our Neutral stance on EM equities as we fail to justify this performance out of fundamental factors. At this stage, we still see no re-acceleration in activity in, the emerging world, and although the 1Q publications look encouraging for now, they do not justify a such rerating. Market analyses & outlook In April, EM equity markets rose +3.22%, a performance superior to that achieved by developed equity markets, down -1.91% over the month. Since the beginning of the year, emerging markets are up % (vs % for the MSCI World). The month was marked by the strong growth of Chinese stocks, with MSCI China up % which, despite the erosion in macro statistics, benefited from the PBOC decision to lower the reserve requirement ratio by 100 bps. Similarly, Brazil (+11.95% for the month) and Russia (+12.45%) rose sharply in April, helped by the rebound in commodities (oil prices back above 65 USD/bbl) and their respective currencies. Regional performance: +5.70% for LatAm, +3.94% for EMEA and +2.52% for EM Asia. Emerging region performances & World Index ( DNR, source MSCI) Source: MSCI, Natixis AM 04/30/2015 Our positions CORE SCENARIO In a market where liquidity remains abundant, and as the Fed seems to push a little further in time the prospect of its first tightening move, EM equity markets benefited from a weaker US dollar, combined with facially more attractive valuation levels. From a strictly fundamental point of view, the lack of positive momentum on economic activity is the main reason why we do not adopt a more positive stance on these markets. Positive on: China, Mexico, Thailand and Turkey. Negative on : Brazil, Russia and Malaysia. Main related risks Renewed episodes of tensions on US Treasuries triggering outflows and weaker EM currencies. Weaker for longer commodity prices. Overall inertia/deterioration in EM macro data compared to DM. Deteriorating investor sentiment towards EM.

11 NATIXIS ASSET MANAGEMENT In brief With assets under management of billion and 648 employees (1), Natixis Asset Management ranks among the leading European asset managers. Natixis Asset Management offers its clients (institutional investors, companies, private banks, retail banks and other distribution networks) tailored, innovative and efficient solutions organised into 6 expertises: Fixed income covers the entire European bond universe: money market, sovereign debt, credit, inflation, aggregate, convertible, etc; European equities delivers active fundamental management and value approach in European large, mid and small cap stocks; Investment and client solutions offers tailored products and services for global allocation, especially for institutional clients, large companies, banks and life insurance companies. Global emerging provides active conviction-based management in equity emerging markets. Structured and volatility, developed by Seeyond (2), offers innovative solutions that conciliate performance and risk reduction research through structured management, flexible asset allocation, active volatility management, model-driven and active protected equity management. Responsible investing, developed by Mirova (3), offers a global responsible investing approach: equities, bonds, infrastructure, Impact investing (4), voting and engagement. Natixis Asset Management s offer is distributed through the global distribution platform of Natixis Global Asset Management, which offers access to the expertise of more than twenty management companies in the United States, Asia and Europe. (1) Source: Natixis Asset Management 31/03/2015. (2) Seeyond is a brand of Natixis Asset Management (3) Mirova is a subsidiary of Natixis Asset Management. (4) Impact investing: investments with a strong social and environmental impact.

12 CONTRIBUTORS Michael AFLALO Head of Institutional and network solutions - Investment and client solutions investment division Matthieu BELONDRADE Head of Global emerging market equities Global emerging investment division Philippe BERTHELOT Head of Credit Fixed income investment division Axel BOTTE - fixed income strategist Fixed income investment division Emmanuel BOURDEIX - co-cio of Natixis AM - Head of volatility and structured investment division (Seeyond) Olivier DE LAROUZIERE Head of Fixed income Fixed income investment division Laurence FRETILLE - Product specialist European equities investment division Raphaël GALLARDO - Strategist Investment and client solutions investment division Ibrahima KOBAR - co-cio of Natixis AM Head of Fixed income investment division Brigitte LE BRIS - Head of International fixed income and currencies Fixed income investment division Yves MAILLOT Head of European equities - European equities investment division Franck NICOLAS Head of Investment and client solutions Investment and client solutions investment division Alain RICHIER Head of Money markets Fixed income investment division François THERET Head of Global and emerging equities Global emerging investment division Philippe WAECHTER Chief economist - Economic research Coordination: Investment and Client Solutions investment division of Natixis Asset Management Natixis Asset Management s Communications Department Source: Strategic Investment Committee Natixis Asset Management Limited liability company - Share capital 50,434, Regulated by AMF under no. GP RCS Paris n Registered Office: 21 quai d Austerlitz Paris Cedex 13 - Tel This document is intended for professional clients only. It may not be used for any purpose other than that for which it was intended and may not be reproduced, disseminated or disclosed to third parties, whether in part or in whole, without prior written consent from Natixis Asset Management. No information contained in this document may be interpreted as being contractual in any way. This document has been produced purely for informational purposes. It consists of a presentation created and prepared by Natixis Asset Management based on sources it considers to be reliable. Natixis Asset Management reserves the right to modify the information presented in this document at any time without notice, and in particular anything relating to the description of the investment process, which under no circumstances constitutes a commitment from Natixis Asset Management. Natixis Asset Management will not be held liable for any decision taken or not taken on the basis of the information in this document, nor for any use that a third party might make of the information. Figures mentioned refer to previous years. Past performance does not guarantee future results.

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