3 Things the European Investment Grade Fixed Income Team Talked About Last Week

ThinkstockPhotos-185165281 1. Euro-area Inflation

There was either good or bad news on Euro-area inflation last week, depending on whether you were ECB President Mario Draghi or Bundesbank President Jens Weidmann. For Mr Draghi, there were welcome signs that headline inflation is beginning to stir again, with the December rate for the Euro-area printing at 1.1%, up from 0.6% in November. Most of the increase was due to the volatile Energy component, and reflects what is called the “base effect” – the fact that the oil price is now over US$50 per barrel as opposed to around US$30 per barrel this time last year. Indeed, the Energy component made a positive contribution to the headline inflation rate for the first time in 30 months, moving from -1.1% year-on-year to +2.5% year-on-year. The Food component also made a substantial contribution, moving from 0.7% to 1.2%, almost totally due to the unprocessed food sub-component. Between them, the Energy and Food components accounted for 0.5% of the 1.1% total. Still, Mr Draghi will be pleased to see that there has finally been some upward movement, and the news will probably get even better in months to come. Forecasters are suggesting that the headline rate could move as high as 1.7% or 1.8% within the next couple of months, before gradually lling back again as the base effect of rising oil prices lessens. It now looks like Euro-area headline inflation might average 1.5% or slightly higher in 2017 – good news for the Governing Council of the ECB, whose decision to reduce the monthly purchases of bonds now looks to have been vindicated, at least in the short-term. However, it’s a slightly different story for Bundesbank President Jens Weidmann. Inflation in Germany in December 2016 printed at 1.7%, uncomfortably close to the 2% level, especially at a time when most Germans perceive the ECB’s monetary policy to be too accommodative. Bear in mind as well that German unions will soon start negotiations for their annual pay round, and that those negotiations often use the January or February inflation numbers as the base for those pay settlements. But despite all the noise about the increase in inflation, we shouldn’t lose sight of the fact that the core rate printed at 0.9%, the same level as it was back 12 months ago in December 2015. We still believe that short-dated inflation-protected bonds in Europe offer attractive valuations.

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What’s in Store for Asian Equities in 2017?

Our Head of Asian Equities, Angelo Corbetta, was recently interviewed for his outlook on the Asian equity market in 2017. To view his video, click on the image below. Or read his transcript that follows.


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What is the optimal way to access Asian equities – through a diversified approach or through a country specific approach?

Right now, we believe the best way is to invest in a pan-Asia approach, simply because you do not want to take too much specific risk given recent volatility in currencies and recent tensions in global yields. Another reason is that by investing with a pan-Asia approach, you can invest in Japan and Australia, which are two developed markets better positioned compared to the emerging markets in Asia. Japan and Australia are the only two markets where companies own foreign assets. Australian and Japanese companies invested many years ago in foreign assets in the US and in Europe. Therefore, they are not in a vulnerable position in terms of the weakening global trade. Continue reading

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Emerging Market Bonds Outlook for 2017

Video: Emerging Market Bonds Outlook for 2017


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What is your outlook for Emerging Markets Debt for 2017?

We are forecasting a pickup in growth in Emerging Markets in 2017. However, of course, the outlook from the returns perspective could be influenced by what’s happening in the U.S., given that interest rates have started to move upwards and that could really add pressure in terms of real returns. So, we think we are looking at low positive returns from emerging markets, and we believe that we are probably going to see flat performance in terms of local currency.

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Fed Signals Three Rate Hikes for 2017

As expected, the Federal Open Market Committee (FOMC) raised the target Fed Funds rate by 25 basis points (bps). The December rate increase represents the sole rate increase for 2016, following the December 2015 move, and the second increase since 2006. What surprised markets is that the FOMC projected three rather than two rate hikes of 0.25% in 2017. In her press conference, Chair Janet Yellen emphasized, however, that this represented a modest change that was driven by improving employment data, as indicated by a lower unemployment rate, higher realized and expected inflation, and as Yellen conceded, the consideration by certain FOMC members of potential changes in fiscal policy under a Trump administration.   Continue reading

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European Equities Outlook for 2017

2016 has been a challenging year for European Equity investors. I provided the following comments at a recent investment conference.

Video: 2017 Outlook for European Equities


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2016 has been particularly difficult for fundamental investors mainly for two reasons. First, there has been a disruptive rotation of themes within the markets. Second, 2016 has been a year of important geopolitical events, for example, Brexit and the US Presidential Election. These events can have repercussions on the performance of the equity markets. We are constructive on 2017 and see a positive outcome from a fundamental point of view. We see companies getting better in terms of delivering on their earnings. However, we are very aware that the uncertainty coming from geopolitical events is not going to go away and could persist for the coming quarters.

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