Economic and financial outlook

Transcription

1 Economic and financial outlook SEPTEMBER 2014 LAZARD FRÈRES GESTION SAS 25, rue de Courcelles Paris Sales department: +33 (0)

2 ECONOMIC OUTLOOK The US enters a new phase of the cycle The Eurozone is heading for a more supportive environment Respectable growth in the rest of the world Conclusion: global growth is improving

3 ECONOMIC OUTLOOK - UNITED STATES The US enters a new phase of the cycle

4 US growth remains strong after a temporary setback in the first quarter After a big disappointment in the first quarter, growth rebounded sharply in the second quarter (+4,2%). Business surveys show that growth should remain strong in the second half of the year. 4 Economic and financial outlook

5 Investment is growing at a faster pace Capital goods orders have been growing faster. Housing starts are growing steadily, but with a lot of volatility. 5 Economic and financial outlook

6 Job creations remain high Despite a weaker number in August, they average 200,000 per month. There is more demand for workers. 6 Economic and financial outlook

7 The level of job creations will probably lead the Federal Reserve to raise interest rates some time next year In her speech in Jackson Hole, Janet Yellen acknowledged that unemployment is falling faster than expected, but she argued that the labour market is less tight than this indicator alone suggests. Nonetheless, if progress in the labour market continues to be more rapid than anticipated ( ), increases in the federal funds rate target could come sooner( )and could be more rapid thereafter. The Federal Reserve will monitor a range of indicators to form an idea about the labour market, but Janet Yellen has recently begun to hint at an earlier rate hike following an acceleration in labour costs. 7 Economic and financial outlook

8 The current US economic cycle is likely to continue for at least another three years The rate-tightening cycle may last for three to five years before bringing about a sharp slowdown in growth (soft landing or recession). Historically, the economy fall into recession after an interest-rate hike and when the cyclical components of activity have a high weight in GDP. In 1995, interest rates were raised when these components had a normal weight in GDP, making a soft landing possible. Soft landing in Economic and financial outlook

9 The current economic expansion might well turn out to be one of the longest of the US history The US economy is now back on a 3,0% growth trend, which will enable the Fed to raise rate next year. The current economic expansion will last for at least a few more years. 9 Economic and financial outlook

10 ECONOMIC OUTLOOK - EUROZONE The Eurozone is heading for a more supportive environment

11 The near-zero growth in the Eurozone in Q2 was very disappointing relative to surveys Growth was disappointing relative to the message conveyed by surveys. We think that the Euro area can be divided between three zones with different situations. 11 Economic and financial outlook

12 The disappointing second quarter in Germany probably understates the real trend growth in this country Three groups of countries can be identified, including one centred around Germany that is performing well, despite its weak performance in the second quarter. In Germany, the recent weakness was most likely transitory. 12 Economic and financial outlook

13 Trends in the Eurozone vary from country to country France and Italy are not seeing any pick up in growth. In contrast, Spain, Ireland and Portugal have seen a return of strong growth. 13 Economic and financial outlook

14 These differences are due to the greater or lesser scale of past reforms In peripheral countries, the reduction in labour costs has been sufficient to reverse past excesses. Labour markets have become more flexible. Countries such as Germany had already implemented all these reforms. 14 Economic and financial outlook

15 Better employment prospects should support consumption Apart from France and Italy, the unemployment rate is falling elsewhere. For the whole Euro area, domestic demand is rising. 15 Economic and financial outlook

16 Total inflation continues to fall because of food and energy, but excluding these items it seems to have stabilised at a very low level Excluding food and energy, prices are growing at an annualised rate of just under 1,0%. The slowdown in prices mainly reflects the situation in peripheral countries and their adjustments. 16 Economic and financial outlook

17 Monetary policy is increasingly accommodative, and budgetary policy will be more supportive The ECB has been more proactive. Banks willingness to lend has improved, which should help the transmission of this ultra-easy monetary policy. Mario Draghi has called to use the flexibility built in the treaties to have a more pro-growth budgetary policy. Forecast made before this speech already showed that, after a few years when budgetary policy has weighted on growth, it should be marginally positive next year. 17 Economic and financial outlook

18 The Euro will keep on weakening, and thus will support growth A weaker euro will support exports. Growth in the Euro Area should improve thanks to a weaker currency, improving credit conditions and an easier fiscal stance. 18 Economic and financial outlook

19 ECONOMIC OUTLOOK REST OF THE WORLD Respectable growth in the rest of the world

20 In Japan, Abenomics is starting to bear fruits, but the VAT impact is still lingering After the VAT hike, consumption is only recovery slowly. The government might launch a stimulus package but the next VAT hike will most likely go as planned. 20 Economic and financial outlook

21 In China, support measures drove a growth recovery in the second quarter, but the residential market needs watching After a disappointing first quarter, measures to boost growth targeted cuts to mandatory reserves, tax exemptions and public spending increases drove a recovery in activity in the second quarter. The residential sector is slowing, both in terms of prices and construction. 21 Economic and financial outlook

22 Economic indicators are generally improving, but the environment remains mixed PMI indices deteriorated at the start of the year, but they have picked up since May. Current account deficits in fragile countries are tending to improve. 6 4 Current account balances as % of GDP Brazil Turkey India Indonesia South Africa Source : 22 Economic and financial outlook

23 ECONOMIC CONCLUSION Global growth is improving

24 Conclusion Global growth should remain respectable (3-3,5%), but this masks mixed developments whose consequences will influence monetary policies. The latest statistics confirmed that the first quarter was merely a mishap in the US and that the country s growth should remain close to its trend rate of 3%. The improvement in the labour market suggests to us that the Federal Reserve will raise interest rates for the first time in around the second quarter of We think the current expansion could last for at least another three years. After weaker than expected growth, due in large part to the timidity of reforms in France and Italy, several support factors should help activity to pick up strength: the depreciation of the euro, a more accommodative policy by the ECB at a time when the traditional transmission channels of monetary policy are normalising, and a moderate easing of the fiscal position. However, the latter implies reforms, principally in France and Italy. In Japan, Abenomics is entering a phase when inflation has accelerated and wages are starting to follow suit. After a soft patch linked to the VAT hike, growth should accelerate again. In China, growth is set to remain at around 7-7,5%. The slowdown in the residential sector is the principal risk. In other emerging countries, growth should recover gradually. 24 Economic and financial outlook

25 FINANCIAL OUTLOOK The fall in bond yields is not justified by fundamentals A supportive environment for Eurozone equities Conclusion

26 FINANCIAL OUTLOOK BOND AND CURRENCY MARKETS The fall in bond yields is not justified by fundamentals

27 In Europe, bond yields are extremely low German 10-year bond yields have reached levels today that have rarely been maintained in Japan, except since the BoJ implemented quantitative easing. This lends credence to the idea that investors are also pricing in a high probability of QE in the Eurozone. Yields have continued to fall despite the improvement in the economic growth outlook. 27 Economic and financial outlook

28 The rise in US yields is likely to push up yields across the Eurozone and to depress the euro Despite their different levels, German yields remain closely correlated to US yields. Yields on the bonds of peripheral countries have fallen steeply. 28 Economic and financial outlook

29 In the credit segment, the level of investment grade spreads will be insufficient to offset a prospective rise in yields In relative terms, subordinated bank credit still offers a healthy spread. 29 Economic and financial outlook

30 FINANCIAL OUTLOOK EQUITY MARKETS A supportive environment for Eurozone equities

31 Equities still appear to us to be the asset class offering the most value Dividend yields comfortably exceed bond yields. Rates would need to go much higher to cause equities to fall. 31 Economic and financial outlook

32 Among equity markets, European equities seem the most attractive to us not because they are much cheaper but because of operating leverage Valuations are back in line with historical average. Company margins in the Eurozone are well below their all-time highs and have huge potential for improvement. The falling euro will be a key driving force. 32 Economic and financial outlook

33 Euro area equities are offering strong earnings growth forecast The level of projected growth remains higher than that of US equities. 0,2 0,18 0,16 Projected EPS growth ,14 0,12 0,1 0,08 0,06 0,04 0,02 0 Source: Factset, Nomura Eurozone US Japan Emerging The business cycle is entering a phase of the cycle less prone to earnings growth. 33 Economic and financial outlook

34 Financial outlook 12-month market outlook + Non-US equities Lazard Objectif Alpha Euro Objectif Recovery Eurozone Objectif Small Caps Euro Norden Objectif Alpha Europe US equities Convertible bonds Objectif Convertible Objectif Converrtible Europe Subordinated financial sector debt Objectif Crédit Fi. The level of global economic growth should underpin corporate earnings. Liquidity is set to remain favourable thanks to moves by the ECB and the Bank of Japan. While the Fed's rate hikes should prompt a rise in long rates, this is not likely to weight on equities since it is part of a normalisation of monetary policy. In the Eurozone, although economic growth is still weak it is improving and the euro's depreciation should have a significant impact on corporate earnings. In Japan, the emphasis of Abenomics on corporate governance should improve profitability. In emerging countries, valuations are still reasonable and uncertainty is declining. However, a certain degree of selectivity is required. In the US, earnings growth is likely to remain good but since margins are high the potential for growth in this area is limited. What's more, a stronger dollar will weigh on overseas earnings. Equities appreciation will help to boost the value of this asset class. Higher yields and the reduction in systemic risk point to a preference for subordinated financial sector debt over high-yield bonds. 34 Economic and financial outlook This opinion dates back to September 2014 and is liable to change. For more information on the product s details, please refer to the prospectus available online at or on request from our offices.

35 Financial outlook 12-month market outlook High-Yield Alternative Yields are still attractive amid moderate growth and abundant liquidity, which means default rates are likely to remain low. Certain asset classes still show many inefficiencies (securitisation) and opportunities for arbitrage (equity markets) for portfolio managers. Corporate bonds Spread levels on investment grade debt are very low, providing little cushion to offset the negative effect of rising rates. Money market The ECB will maintain very low rates for two years at least. - Government bonds (Bund) The fall in long rates since the beginning of the year has been excessive. A normalisation of US monetary policy should push up long rates around the world. 35 Economic and financial outlook This opinion dates back to September 2014 and is liable to change. For more information on the product s details, please refer to the prospectus available online at or on request from our offices.

36 Contactos RESPONSABLE DE VENTAS INSTITUCIONALES EN ESPAÑA Domingo Torres MARKETING Y VENTAS INSTITUCIONALES EN ESPAÑA Roberto Seoane Tel.: (+33) Tel.: (+33) domingo.torres@lazard.fr roberto.seoane@lazard.fr 36 Economic and financial outlook

37 Disclaimer This document is non contractual and is being provided solely by way of information. It presents analyses and descriptions prepared by Lazard Frères Gestion SAS on the basis of general information and statistics obtained from public sources. These analyses and descriptions are provided solely by way of indication, and do not constitute a guarantee as to future performance. Their interpretation may vary according to the methods used. Moreover, the instruments and securities referred to in this document are subject to market fluctuations, and therefore no guarantee can be given as regards their performance and evolution in the future. The analyses and descriptions contained in this document shall not be interpreted as being advice or recommendations on the part of Lazard Frères Gestion SAS. This document does not constitute an offer or invitation to purchase or sell, nor an encouragement to invest in any of the instruments or securities referred to herein. Management methods presented in this document do not constitute an exclusive approach and Lazard Frères Gestion SAS reserves the right to use any other method which it deems appropriate. The presentations are the intellectual property of Lazard Frères Gestion SAS. Moreover, some of the services and investments referred to in this document can present particular risks, and they are not therefore necessarily adapted to all investors. Therefore, all persons must assess independently the risks attached to the services and/or investments. With regards to the services and/or products referred to in this document, all investors shall refer to the conditions offered by Lazard Frères Gestion SAS to its clients. Moreover, any person wanting to invest in the undertakings for collective investment in transferable securities (UCITS) mentioned in this document is required to consult the prospectus approved by the French AMF ( Autorité des Marchés Financiers ) that is provided to all subscribers and which is available on simple request from Lazard Frères Gestion SAS. The information contained in this document has not been independently verified or audited by the statutory auditors of the UCITS concerned. The financial and legal nature of the information provided is for informational purposes and hence does not constitute/represent an opinion. The reader is strongly advised to submit these views to a competent and dedicated office of consultants, specialised in the field of law/fiscal prior to any application. 37 Economic and financial outlook