AXA IM's Macroeconomics and Asset Allocation Convictions for March 2019

According to Laurent Clavel, Head of Research at AXA Investment Managers: “The Eurozone slowdown risks an ECB stalemate”.

• The Eurozone economic slowdown and stubbornly low inflation may prevent any monetary normalisation.

• This would depress euro bond yields and weigh on banks.

• The (modest) drop in oil prices and the fiscal stimulus launched in most EMU member states may limit the slowdown.

• China may also come to the rescue with a sharp acceleration of credit in January.

“The Eurozone slowdown added to disappointing core inflation (1% for two years) may prevent any monetary normalisation. So, we see the probability of our “European Central Bank (ECB) Stalemate” risk scenario rising to 40%. In this scenario the ECB does not get the opportunity to hike rates before the next cyclical upswing and key interest rates remain at their current level (-0.4% for the deposit rate) until 2022. Such an outcome would also see the 10-year bund yield staying at 0.1% until the end of 2020, with a risk of collateral scarcity pulling yields even lower into negative territory.

“This would depress euro bond yields and weigh on banks. Another three years of negative interest rates weighing on banks’ profitability, however, may reduce their lending appetite.

But we see also some good news. The Eurozone member states have been easing fiscal policy. and this is being welcomed by markets. The oil prices have dropped significantly over the past three months (from US$75 to US$65 now for a barrel of Brent crude). This will see a convergence of headline and core inflation rates, which should contribute to rising purchasing power and uphold the resilience of Eurozone domestic demand. And encouragingly, we see the first positive signs of the transmission of the Chinese policy easing (fiscal stimulus as well as credit easing) into the real economy with a sharp rebound in credit growth in January.

“The Chinese administration has been dialing up policy support proactively. More should come, like additional VAT and fee reductions for small- and medium-sized enterprises, or support to boost infrastructure and household spending. The People’s Bank of China (PBoC) is also turning more proactive on monetary policy. We expect another two to three cuts in banks’ reserve requirement ratios throughout this year, and the next one could come as early as March. If a trade deal with the US is struck, which would be positive for RMB, and domestic weakness deepens, cuts to benchmark interest rates (and other market rates) also cannot be ruled out.

“Developing countries, on their side, are set to see an economic slowdown materialise in the first half of the year after the resilient growth reported in the final quarter of 2018. Domestic demand is expected to remain relatively resilient with fiscal policies supporting consumption ahead of elections scheduled in various countries, particularly in emerging Asia (India, Indonesia, Philippines) and act as a buffer to export deceleration. In the Western hemisphere, after years of lacklustre growth, Brazil’s economy should gain traction on the back of new reform momentum generated by the recently appointed administration. Meanwhile, troubled countries such as Turkey and Argentina are in recession but getting closer to the trough as economic rebalancing takes place. All in all, we see scope for emerging economies to start accelerating in the coming quarters and into 2020.”

Click here to read our macro-economic views of the month

Serge Pizem, Global Head of Multi-Asset Investments at AXA IM exposes his asset allocation views for the month to come: “After such a rebound YTD, it’s time to go neutral while keeping a positive focus on emerging market. The big change has been the switch from the Fed and the change of attitude in the US-China negotiations. We feel a good portion of these good news have been priced in.”

• We are overweight on emerging markets assets, both debt and equities

• We have upgraded Euro core government bonds to neutral

• We are underweight on EMU equities

“The recent tide of negative macro data contrasts with US and Eurozone equities now up 10% year-to-date, yet, with these high levels on stocks, we see tighter spreads and lower volatility, making the risk-reward less attractive. In this context, we think it’s time to go neutral on both bonds and equities.”

“The crosscurrents from slowing global growth are unlikely to dissipate in the short term while risk premia and valuations have realigned with fundamentals in most markets such that most of the easy money has been probably made for this year in risky assets. Therefore, we downgrade our equity views over the next 3 months to neutral. And we remain underweight on EMU equities as the region is leading in the economic slowdown.

“We have also decided to neutralize our short duration bias on euro core government bonds despite lower bond yields as a lower growth and falling inflation should cap bond yields.

“Finally, our conviction is to stay positive on emerging markets assets, both debt and equities as a more dovish Fed, a peaking US dollar and cheaper valuations are supportive.”

Click here to know more on our asset allocation views for the month.