#Market Strategy — 07.12.2015

Continue to prefer stocks markets in 2016

Florent Bronès

A world of lasting, low interest rates and ultra-accommodative monetary policies favours equities over the long term.

Divergences on the two sides of the Atlantic

The US economy will continue to grow at a rate of around 2.5% in 2016 and 2017, with full employment. Domestic demand is well oriented and is offsetting the manufacturing sector’s weakness. The Euro-zone will experience a recovery, towards 1.5%, and will start to create jobs, leading to an improvement in the labour market. Logically, monetary policies on each side of the Atlantic will therefore diverge in 2016.

Faced with the risk of deflationary pressure, the ECB is increasing its monetary accommodation, deciding on 3 December to cut its deposit rates to -0.3% and to extend its bond-buying programme both in duration (to March 2017 minimum instead of September 2016) and in the type of bond papers it can buy. But the markets are disappointed by the fact that it has not increased the size of its monthly purchases (which remains at €60 billion).

On the contrary, the Fed will be starting its monetary tightening next week but will remain very moderate. We are counting on four key rate hikes of 25 basis points each in the coming 12 months. The scale of this monetary tightening cycle will be very small; at the end of 2017, Fed fund rates will be below 3% in our scenario. The Fed does not need to be quicker in its normalization because inflation is not currently accelerating.

Most of the euro’s depreciation is behind us

Over the last few weeks, capital markets have taken on board these types of expectations, as much for a moderate Fed as for an aggressive ECB. The euro has depreciated from 1.14 since mid-October to 1.05 at the beginning of December, reflecting just how much this monetary policy divergence is now consensual. We adjust our 3-month EUR/USD target to 1.05 and leave our 12-month target at 1.05. The dollar will remain a strong currency overall, but we have no fundamental reasons for prolonging its upward trend.  Investors with EUR base currency can therefore protect some of their gains. So for the dollar, most of the upward movement is done. Obviously, short-term overshooting is possible and if this occurs we will take advantage of it to trim our positions further.

Continue to prefer stocks markets in 2016

The current environment of moderate, but robust, economic growth and of low inflation (partly owing to commodity prices) is favourable for risky assets.  Interest rates are abnormally low in this economic cycle.  We would not be surprised to see stock markets reacting positively to the Fed’s interest rate hike, a sign of the US central bank’s confidence in the future.

The euro-zone remains our number one choice.  Germany, Spain and Italy are all offering strong earnings growth with stock prices that are still cheap.  We also put forward Japan (excellent profit momentum – due in part to the weak Yen, new share buyback programmes, dividend increases and structural reforms) and the USA (growth visibility and M&A).  We are more cautious or neutral on emerging countries, which are a very mixed bag where corporate profitability is under pressure.