Liquidity will, more than ever, remain a key driver

Cross asset strategy

Even though more cautious than anticipated, the Fed removed the reference to being "patient" from its latest statement, opening the door to a rate increase in the coming months. The first rate hike in the US since 2006 is now anticipated in September by economists’ consensus. The question of a normalization of the financial conditions is not a hot topic in other developed countries. In fact, the ECB and the BoJ continue to inject huge amounts of liquidity into the economy (respectively EUR 60bln/month and YEN 80trn/year). In Europe, for instance, the duration of the programme is linked to an improvement in the inflation outlook and will last until September 2016 or “until a sustained adjustment in the path of inflation”, according to Mr Draghi. In a context of global gradual economic recovery, these financial conditions are clearly supportive of equities.

From a valuation perspective, despite a less appealing absolute valuation, equities are still more attractive than bonds.

Even if March appeared more challenging for equities, especially outside the euro zone and Japan, the current 16.47 level of the MSCI World PE ratio is above the 15.67 median level, meaning that equities are not as appealing as they could be. However, abundant liquidity around the world has kept interest rates at, or near, historically low levels, especially in Europe and Japan, where strong actions are in place. In this context, equities still have a more attractive relative valuation than bonds.

Earnings growth will also continue to support equities: although US and UK earnings growth is expected to be in deceleration or negative this year, the growth rates for other economic areas are substantial, especially in Europe. For 2016 and 2017, the consensus expects substantial growth rates for all major economic areas (see chart 3).

Positive medium-term scenario

As expected, the short-term outlook for equities has been more challenging but medium- to longer- term fundamentals (in terms of growth and global financial conditions) remain healthy for risky assets, especially equities.. With this in mind, we have decided to partially take profit on our convertible bond exposure and reinvest the proceeds in equities.

REGIONAL EQUITY STRATEGY

Euro-zone equities will keep their trend 

We favour euro-zone over US equities

Our scenario for eurozone equities remains intact :

• Equities are still more attractively valued than bonds in the euro zone. Current ECB actions are pushing European yields to all-time lows, with returns near zero or negative. In this context, even if the European stock markets have performed well (more than 18% YTD), they still have a relatively attractive valuation.
• Euro-zone equities are benefiting from a better momentum. Year-on-year earnings growth has been positive since the second half of 2014 and should continue to deliver in 2015, while US earnings are being penalised by a strong USD and the energy sector.
• The euro and oil price depreciation will be favourable to euro-zone equities.

Neutral on emerging markets

Emerging market equities seem to be quite cheap (PE at 11.68, still below the median) but, relative to their earnings growth, the cheapness is less obvious. Furthermore, there is a lot of dispersion among the different emerging countries, sectors and individual stocks. Various macroeconomic forces are in play here, such as the commodity-price decline, the increase in the USD and economic policy divergence. We have a preference for Chinese equities. After the surge of mainland Chinese equity markets over the past 12 months, Hong Kong stocks have now reached their highest valuation discount since 2011. While the Chinese authorities have just expanded the conditions for using the cross-border link between the Shanghai and Hong Kong stock exchanges, the valuation gap should shrink.

Positive on Japan

We have retained our positive stance on Japan. The arguments are still there.

• Valuation is attractive and the BoJ’s additional measures should trigger a potential earnings increase.
• Investors expect a substantial future increase in shareholder return, helped by solid earnings growth and strong cash holdings.
• The change in the asset allocation of the GPIF, Japan’s leading pension fund, is indicative of the sustainable support for Japanese equities.

FIXED INCOME STRATEGY

High yield and emerging debt hold our preference

After its last meeting, the Federal Reserve appeared to be very cautious in its management of the expected interest-rate increase. On the one hand, more dovishly than expected, the FED comforts us in our choice of riskier, higher-yielding bonds. This comes in addition to the combined actions of the ECB and BoJ that are already easing financial conditions. On the other hand, after having stopped to increase its balance sheet a few months ago, Yellen has demonstrated her continuing determination to begin increasing interest rates this year by removing the reference to being "patient" from the Fed’s latest statement. We are therefore maintaining our short position on US treasuries.

Moreover, as high yield and emerging debt still offer the best carry-to-risk ratio (risk-return measure: yield-to-maturity divided by 1-year volatility), we have kept our overweight in these asset classes.

COMMODITIES STRATEGY

Still too early to be positive on commodities

Although probably a lot of the bad news on excess supply and lower global economic growth has already been integrated, it is still too soon to become positive.

Oil: despite oil prices seeming to have bottomed, the repricing will be long. In fact, although futures are now quite stable or in an upwarding trend for short-term deliveries (USD 55 one month ago, around USD 60 today), for long-term deliveries, oil prices continue to be adjusted downwards (see chart 4). US crude oil inventories are still at record levels and hopes of a deal between Iran and six world powers (UN Security Council plus Germany) have increased fears that Tehran crude oil could weigh more on the current oversupply.

Base metals are being penalized by the current decreasing trend in US and Chinese manufacturing activity. Nonetheless, the oversupply problem is going to be solved for some base metals such as copper, zinc and nickel, with supply deficits from 2016-2017. We consider it too early to invest in this asset class.

Finally, gold prices are negatively correlated with US real interest rates, which should at last increase in 2015.