Do you believe that the risk asset sell-off reflects a fundamental deterioration of economic conditions globally?
We don’t think we are currently facing a fundamental risk of deteriorating
economic conditions. Financial markets discount the risk of a recession. This is not
the case in our view: world GDP growth is decent, albeit below potential and
uneven, inflation dynamics are mostly being influenced by oil prices, and Central
Banks are still very proactive and supportive. However, we recognize that overall
economic and stability conditions remain vulnerable, while corporate earnings in
the US are in the late stages of the cycle. Financial markets are exposed to
contingent elements that reflect a deeper malaise in terms of being policy
dependent. China, in particular, is the country that worries the markets the most.
While conscious of the risk of policy mistakes, we remain constructive on China
while closely monitoring policy actions.
What are the consequences of low oil prices and what’s your view for the 2016?
Generally speaking, lower oil prices are positive for both economies and equity
markets. However, to have a proper interpretation, it is important in our view to
identify the causes, the size and length of the shock and frame this against the
current economic and market conditions.We believe that today’s oil price
dynamics are mainly driven by a mismatch between demand and supply that results
in an oversupply. A secondary reason for the decline in oil, at least for the time
being, is a slowing in economic growth.We believe the final effect on the economy
depends on the nature of the oil shock.With a supply-driven shock (historically less
frequent, but today’s case) the correlation with the economy is on average negative: under such a scenario a lower oil price should have a positive effect on growth. By contrast, a demand-driven shock will show a positive correlation. The persistent
decline in oil prices has forced us to re-estimate our inflation forecast for 2016,
which is now down to 1.5% in the US, 0.8% in both the Eurozone and Japan.We
don’t believe that a global deflation will materialize: if we exclude the energy
component the scenario is for a moderate inflation almost everywhere. However,
we see pressures mounting for new Central Bank actions. Central Bank governors
are facing a widening gap between current inflation levels and targets, fragile
economic growth and financial market turmoil. Not exactly the ideal world.
Oil prices are just one piece of evidence regarding the fragility of the economic
environment. However, should our thesis of supply shock hold, and oil prices
converge back to equilibrium levels in the medium term, a positive reaction from
the equity market is likely. In the meantime, the High Yield market, where energy is
a relevant component, will likely remain under pressure.
Do you see the risk of an Emerging Market meltdown or, conversely, do you see triggers for an acceleration in EM growth?
We prefer to look at Emerging Markets at the individual country level, as they are
highly heterogeneous, in particular over the last 3 years. The weakness of the
commodity cycle was especially harmful for most of these countries, but we expect a
modest improvement in 2016.We continue to look at those countries that show a
credible commitment to rebalancing their economies, improving their economic
and stability conditions, and reducing their external vulnerability. India and
Indonesia are, in our view, on the right track and have policy room to maneuver to
potentially address external vulnerabilities. Overall, uncertainties remain high in the
area and most of the outlook depends on China.We don’t buy the idea of a
recession there, but we are conscious that there is a risk of policy mismanagement.
What happened in August 2015 with the Renminbi was striking in this sense: the
liberalization of financial markets is a crucial aspect of the transition of the Chinese
economy, and such accidents unfortunately can happen. Data show that the
economy is rebalancing, but we should not forget that China’s economic partners
are not yet ready to face a further decline in activity from their traditional consumer
of last resort.
How is the market turmoil impacting the outlook for developed countries?
The market instability reflects a combination of macroeconomic and technical
factors, mostly related to China.While persistently low oil prices allowed us to slash
our inflation projections, we don’t see dramatic changes in our scenario and we
continue to expect a low growth, lowflation environment with global central bank
policies designed to act as catalysts.We are conscious of the rising downside risks,
and as a result we attach “fatter tails” to our central case. Right now, we are looking
very carefully at the current earnings reporting season as we attempt to develop a
comprehensive view of the economic backdrop.
What are the investment themes from a multi asset perspective, under the current market scenario?
We remain relatively positive notwithstanding the recent market sell-off. On the
other hand, we believe that market volatility will continue to remain high, with
markets vulnerable to the news flow from China, Central Banks and Emerging
Markets.We started the year with a cautious stance, with hedges on risk assets.We
are more likely to engage new risks and opportunities within the alpha space rather than beta. Having said that, the current market scenario requires Central Banks to
remain vigilant and proactive.We believe the divergence in monetary policies will
continue, with Central Banks remaining accommodative where required.We expect
the Fed to gradually raise rates, remaining very data dependent. This will likely
imply a stronger US dollar, a theme that we continue to play versus other major
currencies. Moreover, monetary policy divergence and a better outlook for
European margins and earnings growth substantiate a preference for European vs
US equities.We remain constructive on Japanese equities, while looking at earnings
to evaluate further positioning in the area. Selectivity is key in Emerging Markets,
where we prefer countries such as India that have sufficient space and credibility for
adjustment and rebalancing of the economy.With an income perspective, we
believe that some opportunities can be exploited in the credit market
 The degree of association between two or more variables; in finance, it is the degree to which assets or asset class
prices have moved in relation to one another. Correlation is expressed by a correlation coefficient that ranges from -1
(never move together) through 0 (absolutely independent) to 1 (always move together).
 Alpha – The additional return above the expected return of the beta adjusted return of the market; a positive alpha
suggests risk-adjusted value added by the money manager versus the index.
Beta – A statistical measurement of an investment’s sensitivity (volatility) to marketmovements in relation to an
index; for example, a beta pf 1.2 suggests 20% more volatility in returns than the benchmark, which is assigned a
beta of 1.0.