Asset management

Investment strategy - October 2009 : Economic policy is still critical

“Investment Strategy”sets forth the different asset allocation choices which are implemented in BNP Paribas Asset Management's portfolios. The investment strategy derives from a running analysis of numerous factors (i.e. the general economic situation, earnings growth rates and financial ratios, assessment of market valuations, technical analysis).

Economic policy is still critical
The consensus is now well established and has been confirmed by central banks, national governments and international institutions: we have seen the worst of the recession. We believe the recovery will continue, mainly because public institutions know very well that further monetary and fiscal stimulus might be necessary to get ailing economies back on their feet.

Question for 2010
But beyond the cyclical rebound, which until now has seen a stream of good news that has been fuelling an equity market rally since March, the developed economies are likely to experience a period of sluggish growth due to high unemployment, which in the OECD countries could rise from 8.5% in July to almost 10% in 2010. With the labour market this weak, national governments will probably extend their exceptional measures to support economic activity and postpone the return to fiscal discipline until 2011. Public officials believe that the recovery is still fragile, and they are right.
Although the return of financial conditions toward normalcy has helped revive investor appetite for the riskier asset classes, concerns as to how central banks will exit their accommodative monetary policies could increase the volatility of short and long-term yields, and consequently that of other assets as well. The Federal Reserve's efforts to bring a smooth end to its asset purchase programme reflect not only its desire to prevent imbalances in financial markets but also its fear that the progress that has been so difficult to achieve might suddenly be compromised. We believe that central banks will do their best to exit from their exceptional policy measures and extremely low interest rates. However, we are likely to see more concern about economic growth and the normalisation of monetary policy in 2010.

Near-term dynamics still relatively favourable
But even though the concerns mentioned above have already raised their heads, the favourable dynamics in economic conditions (restocking and the manufacturing recovery) and in the outlook for corporate earnings should continue to support the riskier asset classes for the rest of this year.
Even though equity markets have made impressive gains since hitting bottom in March (the MSCI World was up 66% on October 6), institutional investors are still underexposed. This situation offers additional upside potential that continues to justify an overweight position in equities, although there will certainly be some ups and downs along the way.

Investment Strategy: September 2009 - A lovely summer

“Investment Strategy”sets forth the different asset allocation choices which are implemented in BNP Paribas Asset Management's portfolios. The investment strategy derives from a running analysis of numerous factors (i.e. the general economic situation, earnings growth rates and financial ratios, assessment of market valuations, technical analysis).

A lovely summer

The outlook for recovery in the second half of this year has become a bit brighter over the past few weeks, contributing to the rise in share prices, which were also boosted by surprisingly strong corporate earnings. Although the worst now seems behind us some clouds remain on the horizon, since growth will remain subdued for some time and sales are also likely to disappoint.

However, the current dynamic is positive. Private-sector economists, central banks and international institutions worldwide have raised their GDP forecasts. Securities analysts have also taken note of second-quarter earnings figures and have raised their earnings forecasts sharply.

Central bankers still cautious

Central banks are using very cautious language and are careful to point out the uncertainties that remain. Their attitude could have two positive effects: it could prevent investors from being overly disappointed by economic data when the pace of economic recovery slackens after the sharp rebound in manufacturing; and it could above all provide reassurance that accommodative monetary policies will be maintained. This is no doubt the objective of Ben Bernanke and his counterparts. This message also applies to fiscal policy. The OECD has thus pointed out that: "Preparing credible exit strategies and fiscal consolidation plans now, even if actual implementation will only commence later, is desirable". The statement of the G20 finance ministers, after their meeting in early September, expresses this same idea: "we will continue to implement [...] expansionary fiscal and monetary policies [...] until a global recovery is firmly secured".

The long-term environment for equity markets is buoyant

Given the positive trend in economic conditions and the attention that government authorities continue to focus on their economies, we do not foresee another marked slump in economic activity, but rather the stabilisation of growth below its potential. The exuberance in equity markets over the past few months (the MSCI AC World is up 60 % from its year-to-date low of early March) has brought investor sentiment indicators to very optimistic levels. Although they do not yet send a sell signal, the risk of a near-term correction has grown. However, since institutional investors are still substantially underexposed to equities this should limit the magnitude of any technical correction, particularly since valuations do not seem too high and the prospect of mergers and acquisitions is becoming an increasingly strong theme. We have therefore increased our overweight in equities a bit.