Chart of the Day – Cross Asset Correlation is VERY Low

Source: Morgan Stanley

Per MS’s report dated Jan 3rd 2017:

« 2016 saw the 3rd best annual performance for US High Yield on record. Commodities posted their best year of returns since 2009, a feat all the more impressive given early losses. It was a surprisingly ho-hum year for performance in global equities (+8.5% in MSCI ACWI), global rates, and the USD (+4.3%), with those numbers masking big divergences by region, style, and the 1st-versus-2nd half of the year. We also note that global correlations have plunged, driven largely by the breakdown in rates correlation to risk assets and regional correlations within equities. »

Risk Appetite Needs Growth – Goldman Sachs

Source: Goldman Sachs

Per today’s report:

« As equities rallied and bonds sold off, our measure of risk appetite reached a new post-crisis high, but it has started to retreat more recently. Near-term, we think growth optimism will persist and keep risk appetite strong. We are long US equity near-term as it should be a direct beneficiary of growth optimism, but expect optimism to moderate eventually. Later in 2017 we are looking to rotate from S&P 500 to EM (specifically EM-ex-China) where risk appetite has lagged and we expect the growth picture to be more supportive. We also like Europe and Japan on a 12-month horizon in our asset allocation. Both of these lagged global equities in 2016, but should continue to be beneficiaries of reflation and have supportive monetary policy backdrops. »

On a 12 month horizon, GS is overweight Equities, with a bias towards Europe and Japan, but underweight US equities and Neutral on Asia ex-Japan.

The bank underweights Government bonds and is Neutral on credit (yet with a preference for US High Yield and Euro High Yield).

It’s also Overweight Commodities and Cash.

Quelques questions de fond

Les stratégistes de JPMorgan ont profité d’une semaine sans événements notables pour passer en revue une série de questions de fond sur différentes classes d’actifs. Intéressant…

« Why has neither Greece nor Germany left EMU, yet? Or even, why did they ever get in? The crisis has revealed the cost of giving up one’s currency. Resolution requires massive deflation in the periphery and massive funding from the core. The reason countries joined into EMU and have not (yet) left is that monetary union was planned as the first step towards a political union –– a US of E. The cost of abandoning EMU is not merely related to capital flight and creation of a new currency, but is paramount to ditching European integration, and moving back to the bad old days of a divided and quarrelsome Europe. EMU members will likely do everything they can to keep the union together, even as they will need more crises to push them that way.

Why has the euro not collapsed, yet, given a recession and EMU break-up risk? The EMU periphery cannot devalue against the core, but would greatly benefit from a drop in the euro. The answer is likely that currencies are relative prices, and the fiscal situation in the US, UK, and Japan is as bad as in the Euro area, even as the latter has problems with internal funding. Each of these four currencies has fallen dramatically against the smaller G10 countries that are in better shape (CAD, CHF, AUD, NOK). The Euro area also has no external deficit, and funding problems may have led to capital repatriation, supporting the euro.

Why are US HG credit spreads still near recession levels? US HG remains about 200bp above USTs, a spread level that before Lehman was only seen risk elevated.

Who do some many investors pile into safe assets that offer no real return after taxes and inflation? The average yield on all global bonds now stands at 2.4%. Managers tell us that the end investors care most about capital preservation. If so, they are forgetting about taxes and inflation –– global headline CPI was +3.8% oya in 2011. Two explanations come to mind. Institutional investors are steered away from equities, as regulators are forcing them to judge the risk on equities, which are long-term investments, on the basis of short-term volatility (1-year), despite equities being long term assets. G4 insurers and pension funds have been buying $6 of bonds for every $1 of equity over the past 6 years. The puzzle is greater for unregulated end investors, in particular retail. YTD, funds and ETFs have seen the same 6-for-1 bonds to equity inflows. Widespread fear and persistent uncertainty are likely behind this puzzle.

Why no deflation, given global slack, nor rise in inflation expectations given debt demonetization? Simple output gap models would indeed have suggested a dramatic drop in global inflation, if not outright deflation. We did not get this, showing there is clear downward rigidity to nominal wages, and also less useable slack than we thought. These give this puzzle a name but are not an explanation. A better explanation could be ultra easy monetary policy that killed deflation fears. But why have these not turned into inflation fears? Part of the explanation is that central bankers have done a tremendously good job in convincing us they are only combating deflation and will react decisively when inflation emerges. And the world wants them to be right.

Why are commodities up 65% since the recession, while the world economy is growing below capacity? The answer is likely an application of the hog cycle. During the recession, commodity prices cratered and project financing evaporated. Commodity producers cancelled investment projects, greatly restraining future supply growth. Demand growth since the recession has outstripped weak supply growth, pushing up commodity prices. But with much higher commodity prices and easier funding, producers are investing and capacity is increasing. The hog cycle is not dead.

Why do Japanese investors keep buying their own public sector debt, which is racing to 250% of GDP by 2015, twice the level that got Greece in trouble? Part of the explanation is what we call financial repression, where the government puts pressure on domestic institutional investors, frequently through regulations. But much of the explanation is likely deflation, which creates acceptable real return to bonds, that are not taxed. The eventual JGB crisis must await 2015 or later, when demographics drive the country into an external balance that requires foreign borrowing, something that will not be possible at current yields. »

Le haut rendement plus fort que les actions

Indiscutable graphique illustrant la performance des actions mondiales et des titres de crédit à haut rendement des entreprises.

« Le high yield est peut-être l’une des plus belles classes d’actifs dans un environnement de marché compliqué »

Cette citation est d’Etienne Gorgeon, patron de la gestion taux et crédit d’Edmond de Rothschild Investment Managers. Dans un environnement de marché volatil et complexe, marqué par une croissance économique durablement atone dans les pays développés, le plus important pour les investisseurs est la protection du capital et la recherche d’un rendement raisonnable. Continuer la lecture de « Le haut rendement plus fort que les actions »

Ce que les investisseurs achètent lorsqu’ils sont moins averses au risque

Le moins que l’on puisse dire, c’est que l’on vit une période de grande fébrilité des investisseurs, qui se traduit par une alternance de phase de forte hausse puis de forte baisse de l’aversion au risque – que les anglosaxons qualifient de « RORO » (« Risk On Risk Off »). Avec la dernière phase de hausse des marchés, les investisseurs ont privilégié 3 classes d’actifs : le haut rendement (« high yield »), les actions émergents et la dette émergente. La part de cash dans les portefeuilles des gérants reste élevée. La prudence règne donc malgré tout, comme l’a montré la dernière enquête de Bank of America Merrill Lynch auprès des investisseurs.

Concernant le sommet européen, les stratégistes de Merrill Lynch résument bien les attentes du marché, ce qui sera bien perçu et ce qui pourrait provoquer une rechute des indices boursiers:

« Bull & Bear European Headlines
Bullish headlines would be: >1 trillion Euros for EFSF; >100 billion Euros for bank recapitalization; >50% haircut for private holders of Greek debt; buy-in from Sovereign Wealth Funds. Bearish headlines: <1 trillion Euros for the EFSF; <100 billion Euros for bank recapitalization; <50% haircut for private holders of Greek debt; no global buy-in from SWFs. Lower Italian bond yields (-100bps on 5y) & higher European bank credit prices (EB00 Index > 220) needed to cause sustained “risk-on”.
US Driver = Macro
“If next GDP revision is up, go long stocks, if next GDP revision is down, go short stocks”; US GDP revisions and US bond yields have been correlated this year and both edging higher. »

Les actifs risqués toujours prisés… en attendant la fin de QE2 ?

Si l’on fait abstraction du mini flash krach de la semaine dernière, qui a vu un plongeon de 11% de l’indice S&P GSCI qui regroupe 24 matières premières, la tendance haussière des actifs risqués ne semble pas démentie, alimentée par la confirmation d’une reprise économique mondiale (attendue à 4,2% cette année) et par l’afflux de liquidités (merci la Fed). Continuer la lecture de « Les actifs risqués toujours prisés… en attendant la fin de QE2 ? »