NEWSLETTER Natixis Global AM workshop April, 10 th 2013

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1 NEWSLETTER Natixis Global AM workshop April, 10 th 2013 Resurgence of instability: what are the best investment strategies to make the most of volatility? Macroeconomic overview: is Europe a source of instability once again? Philippe Waechter, Chief economist Low interest rates and rising volatility: how can one build an interest rate portfolio? Olivier de Larouzière, Head of Interest rates Equity markets: how can one tap their volatility? Emmanuel Bourdeix, co-cio in charge of Seeyond* investment division Pascal Voisin CEO of Natixis Asset Management "More than just constraints, volatility and correlation regimes are turning into management tools in their own right" The macroeconomic scenarios sketched out at the Natixis Global AM Workshop at the beginning of the year remain highly relevant. There is still no one geographic region able to breathe new life into the economy. In this tense environment, central banks will continue or even accentuate their accommodating policies. They will maintain lastingly low interest rates and steer investment flows towards risky assets. Lastly, while the ECB has averted the systemic risk of the euro zone imploding, extended austerity policies also increase the risks of the zone getting bogged down in recession, with the spectre of social unrest. Global allocation: where are the correlations? Franck Nicolas, Head of investment and client solutions All these questions were addressed by Natixis Asset Management s experts during the 20 th edition of the Workshop. Introduced by Natixis AM CEO Pascal Voisin and steered by Christophe Point, Head of Sales, Natixis Global AM France, this second big rendezvous of the year was attended by more than 200 participants. This market configuration has placed volatility and correlation issues centre stage, and for the long term. Volatility and correlation are becoming essential components of portfolio management alongside trend and yield forecasting. Not only for hedging purposes, but also and above all to favour diversified allocation and lock in new sources of performance. Written on April, 15 th 2013 * Seeyond is Natixis Asset Management s structured product and volatility management investment division. The Natixis Global Asset Management Workshop of 10 April was attended by around 200 participants. WHOLESALE BANKING / INVESTMENT SOLUTIONS / SPECIALIZED FINANCIAL SERVICES

2 Macroeconomic overview: is Europe a source of instability once again? The euro zone is facing three challenges - inventing a new growth model, solving the debt crisis and mapping out an institutional construction adapted to the world of today that make it a source of instability for the global economy. Philippe Waechter Chief economist Unprecedented stagnation By contrast with previous crises, Europe is no longer able to trigger a lasting revival. While in previous recessions ( and ), it took less than three years to rebound above pre-crisis levels, French GDP per capita is currently lower than its level of 2007, as shown in the chart below. Europe s dynamism used to be a crucial factor in exiting crises today, its lack of responsiveness has become an issue. In the last 18 months, the region s contribution to global economic growth has even turned negative, resulting in a virtual stagnation in global trade. With Europe struggling to find new momentum, the global economy s centre of gravity seems to be shifting to the Pacific. France: GDP per capita when pulling out of recession 114 Base 100 last good year before the recession 112 For 2013, European Commission forecast Annual data Sources: Maddison, European Commission, INSEE, Datastream, Natixis AM The euro zone has its back to the wall With limited global momentum, private agents, faced with a great deal of uncertainty, cannot take over, especially when governments step up restrictive economic policies. The euro zone s economy is therefore deprived of any pool of demand. Under these circumstances, the declining growth trajectories and plethora of domestic issues force each country to apply specific structural reforms. This will take time, and the ECB is attempting to alter investor expectations by clearly stating its determination of maintaining a highly accommodating monetary policy for as long as it takes. An institutional process that causes instability Given the relative size of its economy, the euro zone s current stalemate is a factor of instability. The zone must aim to renew with autonomous growth while managing past imbalances. Better coordination is required to clarify the dialectic between European institutions and euro zone countries, notably through mutual consent by each member country to relinquish part of its budgetary sovereignty. Mario Draghi paved the way by exceeding the limits of his mandate with the shortterm sovereign bond purchase programme, or Outright Monetary Transactions (OMT), and more progress has been made with the European Stability Mechanism, the Fiscal Compact and the proposed European banking 2 / NEWSLETTER - APRIL 2013 /// NATIXIS GLOBAL ASSET MANAGEMENT WORKSHOP

3 union. This is just a start. Should this process fail to be completed, the euro zone would remain a potential factor of destabilisation for the global economy Euro zone - Economic momentum Annual growth rate of trend: 1.9% Growth since trough (Q2 09): 0.8% (annual rate) Trend calculated over 2000 Q and extended to Q With Europe struggling to find new momentum, the global economy s centre of gravity seems to be shifting to the Pacific GPD in level 1900 Billion euros at constant prices Sources: Datastream, Natixis AM Decisive choices The euro zone must make decisive choices and shake up the inertia of its institutions to gain more flexibility. Before reinventing its growth model, the new institutional framework must be both stabilised and adapted to the reality of today s world: fierce competition, continual technological shocks challenging corporate strategies and requiring constant faculties of adaptation, structuring choices in terms of energy for the future, etc. For the euro zone, this is the only way of preserving its position in a multipolar and ultra-competitive global balance. Read more Get real-time analysis of French, European and international economic news in Philippe Waechter's articles and videos on: WebTV Blog philippewaechter.nam.natixis.com / 3

4 Low interest rates and rising volatility: how can one build an interest rate portfolio? Yields and volatility have reduced in an unprecedented manner, and achieving performance now requires greater selectiveness, notably in terms of country allocation. Olivier de Larouzière Head of Interest rates Yield convergence Recently, interest rates have converged downwards in very significant proportions, often resulting in spectacular performances in While they have reduced drastically in absolute value, credit spreads nonetheless reflect a justified premium in relation to sovereign rates (the spread is close to 40%, way above pre-crisis levels). solvency risks influence long maturities). Given the bottom-up convergence in yields, global sensitivity has a reduced impact and country allocation has become the main performance driver of the Euro Sovereigns strategy since With no hierarchy in yields and volatility, performance is now achieved through greater selectiveness. Another requirement is setting up long strategies on options or volatility so as to limit the risk of straying from the baseline scenario. The hierarchy between volatilities is disappearing Sovereign debt volatility is now converging markedly with credit volatility after having almost systematically exceeded it since As a result, despite a sharp rebound last year, volatility levels across bond markets are now flirting with their pre-crisis levels. Country risk is becoming the discriminating variable Given the credit risks specific to each country, sovereign debt management generates performance mainly from choices of regions and maturities (default risks have an impact on short maturities, while In a lasting and widespread low interest rate environment, market movements are governed essentially by flows. 4 / NEWSLETTER - APRIL 2013 /// NATIXIS GLOBAL ASSET MANAGEMENT WORKSHOP

5 Equity markets: how can one tap their volatility? After several decades of fairly linear growth, equity markets have become more erratic while lacking clear-cut trends. This has put volatility back centre stage in investment management. Emmanuel Bourdeix co-cio in charge of Seeyond* investment division Fundamental analysis is no longer enough The consensus is no longer nimble enough to factor in the speed and extent of changes in corporate earnings. As a result, building efficient equity portfolios now requires considering other factors than just the fundamentals. In equity markets that are structurally more uncertain, it has become at least as important to seek to tap equity volatility as to monitor trends. Volatility used as a decision support tool Over the long term, the least volatile equities have significantly outperformed the most volatile. In other words, minimising ex-ante risk has become a performance driver per se. Minimum Variance-type strategies, which respond quickly to market vagaries, can be used to significantly reduce risk in an equity portfolio without forgoing long term performance. As an addition to fundamental stock picking, this approach improves yield predictability and consistency in a global allocation. Volatility used as an asset class Actively managed exposure to volatility can provide both attractive coverage and a source of performance decorrelated to the main asset classes. While high carry costs invalidate buy-and-hold strategies, the fund manager s goal here is to make the most of changes in regime with a flexible strategy linked to volatility indices. This approach is well suited to the current market configuration, in which volatility looks set to remain on a steady course with some violent swings. It has become at least as important to seek to tap equity volatility as to monitor trends. *Seeyond is Natixis Asset Management s structured product and volatility management investment division. / 5

6 Global allocation: where are the correlations? Stronger correlations require cutting across the conventional bond/equity divide in favour of a risk factor allocation. Franck Nicolas Head of Investment and client solutions Deep breaks in conventional correlation regimes The succession of financial crises has generated new relations between asset classes, with a negative correlation between equities and bonds, while gold has risen in line with the balance sheets of Western central banks. In the risky asset segment, private sector assets (equities and credit) appreciated together, but commodities and emerging currencies remained flat due to weak global demand. Lastly, a country and sector rationale, both for equities and bonds, moved back to the centre of portfolio construction with very sharp regional decoupling in the euro zone, or due to the fact that European financial stocks had become highly correlated to euro zone peripheral bonds. Cutting across the bond/equity divide Should there be an economic normalisation, with a slowdown in accommodating monetary policies or a partial recovery in global economy, these relations would be likely to trend differently. The questions to ask in a global portfolio would be different. Investors must overcome the backward-looking and overly simple bond/equity divide in favour of a risk factor allocation, in which the weight of large asset classes (bonds, equities and diversifying assets) derives from their respective contribution to the portfolio s global risk. This approach requires analysing the cyclicality of each sub-asset class to strategic themes (monetary policy/inflation, solvency, global trade, etc.) and their sensitivity to specific technical situations. Investors must overcome the backwardlooking and overly simple bond/equity divide in favour of a risk factor allocation... 7 / NEWSLETTER - APRIL 2013 /// NATIXIS GLOBAL ASSET MANAGEMENT WORKSHOP

7 In brief Natixis Global Asset Management ranks among the world s thirteen largest asset managers in terms of assets under management*. Natixis Global Asset Management brings together the expertise of more than twenty specialised investment management companies based in Europe, the United States and Asia to offer a wide range of investment strategies and solutions in all asset classes. This distinctive multi affiliates organisation and a unique global distribution platform allow Natixis Global Asset Management to respond to changes in the asset management market with expert, innovative and high added value solutions. GATEWAY I NVESTMENT A DVISERS, LLC * Cerulli Quantitative Update: 2012 Global Markets study, based on assets under management at end Source Natixis Asset Management as of 31/12/2012. ///// Contact us: communication@am.natixis.com The website: DISCLAIMER This document is destined for professional clients. None of the information contained in this document should be interpreted as having any contractual value. Natixis Global Asset Management will not be held responsible for any decision taken or not taken on the basis of information contained in this document, nor in the use that a third-party may make of it. The opinions expressed in the research and analyses are the sole responsibility of their authors and are not necessarily shared by Natixis Global Asset Management. Natixis Global Asset Management shall not be held liable for the accuracy and exclusivity of the information provided. W W W. N G A M. N AT IX IS.COM / 8

8 Natixis Asset Management - Communication department - April Workshop pictures : Chloé Bizot/Natixis. Cover picture and inside design: Frédéric Dupertuys. NATIXIS GLOBAL ASSET MANAGEMENT French Limited Liability, private, unlisted company Share Capital: Registered with the Paris trade office under number NATIXIS ASSET MANAGEMENT Limited Liability Company - Share Capital: ,76 RCS Paris Regulated by AMF: GP quai d Austerlitz Paris Cedex 13