IMT Asset Management AG
Austrasse 56 · P.O. Box 452
9490 Vaduz, Liechtenstein
[email protected] · www.imt.li
INVESTMENT OUTLOOK
02.2017
10 February 2017
Those, including us, who expected that President
Trump would act and speak differently from the election campaigner Trump, proved to be wrong. President Trump has started, without any hesitation, to
implement his very controversial election promises,
which many did not take literally. In doing so, he has
caused considerable political shock waves.
Meanwhile, we continue to see solid growth indicators and strong performance of risky assets. The socalled reflation trade continues and the market expects solid global growth and a certain healthy inflation pick-up. The market is – in our view – complacent
when it comes to existing geo-political risks and uncertainties about the implications of the Trump policy
mix.
We stay constructive for risky assets, in general, but
also nervous about political risks related to the new
US administration and right-wing populism in Europe.
Thomas Trauth
CEO – IMT Asset Management AG
IMT Asset Management AG
Investment Outlook 02.2017
THE TRUMP ERA HAS STARTED
President Trump has unleashed a series of initiatives
which have destroyed our hope that, once in power,
he would become tamer and would allow competent
people in the administration and in the Republican
party to help him run the country prudently and diligently. We now know for a fact that Trump is committed to fulfilling his electoral promises — which
seems to includes bringing down the establishment.
He acts ruthlessly, without honoring international
contracts or the US legal framework. He does not hesitate to blame or threaten individual companies, foreign politicians, judges, and other individuals. What
we observed in the last couple of weeks makes us
very concerned about the future economic and geopolitical implications of the US presidency.
Nikkei 225 index, both of which fell by 0.4% in January.
While the 10-year Treasury yield stabilized at about
2.4%, the European 10-year yield rose 23 basis points.
Yields at the short end of the curve rose only slightly.
Consistent with the theme of global reflation, breakeven inflation rates continued to rise in Europe as
well as in the US. The 2-year interest rate differential
has now reached about 2%, which makes it quite expensive to short the USD.
Oil prices gave back some of their previous gains. The
price for Brent oil fell 3.4% in January. Meanwhile industrial metals continued their ascent and rose 7.5%
in January. Despite the risk-on environment the gold
price recovered from the steep sell-off in Q4 and
gained 5.5%.
In our view, Trump, Brexit, and the various European
protest parties, are the result of broad-based frustration with encrusted political systems, politicians without vision, a lack of clear decisive decision-making,
overregulation, and overly complicated legal and tax
systems. Our hope is that the established governments – not least in the EU – will learn the right lessons and start reforming themselves before disruptive forces become too strong and take over.
REITS remained under selling pressure, probably because rising yields are seen as negative for real estate
investments. However, in our view, REITS may start
to look attractive again. Stronger growth and rising
inflation should allow many REITS to increase rental
fees.
The USD gave back some of its Q4 gains. Probably, the
USD was a bit overbought. Also, markets started to
worry about the negative impact of US protectionism
and a potential trade war with China. The CHF has appreciated since November and the SNB seem somewhat less committed to take measures against CHF
strength. Still we would expect the SNB to act again if
the EUR-CHF exchange rate were to fall below 1.06.
Financial markets
Equity markets continued to rally. It seems as if president Trump has cleared the view of investors on last
year’s positive macro fundamentals. Emerging markets gained 5.4% in January and clearly outperformed
developed markets. Within developed markets the
US S&P500 index gained1.8% and clearly outperformed the European MSCI Europe and the Japanese
–2–
IMT Asset Management AG
Investment Outlook 02.2017
Macro economics
Outlook
The European PMI surged to 55.2 after 54.9. Also, the
US PMI strongly rose to 56.0 in January after 54.5. The
US non-farm payrolls for January rose more strongly
than expected, by 227,000 after 157,000. The laborforce participation rate rose to 62,9%, its highest level
since September. Interestingly, labor-market tightening came without accelerating wage pressure. Average hourly earnings rose 2.5% year-on-year, and
clearly less than the previous reading of 2.8%. As a
result, Fed rate-hike expectations fell somewhat after
the release of the labor-market statistics.
The growth outlook has clearly brightened and additional stimulus from the US government, including tax
cuts, fiscal stimulus, and deregulation should further
support the economy. The strong USD is supportive
for other regions.
Despite the positive outlook, we have decided to
maintain our slight portfolio tilt in favor of risky assets, but we are hesitant to move towards more aggressive overweight positons. The reason is that we
are becoming increasingly concerned about the
growth-unfriendly side of Trump’s policy mix, i.e., immigration, protectionism, and arbitrary interference
in companies’ investment decisions. As a result, the
risk of trade wars has risen; especially the US-Chinese
relationship is at risk.
Inflation rose, not least due to base effects resulting
from the sharp drop in oil prices a year ago. US inflation stood at 2.3% in January after 2.1% in December.
Likewise, EMU inflation was clearly up to 1.8% in January after 1.1% in December.
Within equities we introduced an underweight position in European equities, since Europe may suffer
from US protectionism, and the upcoming European
elections in France, the Netherlands, and Germany
have the potential to unsettle investors. While Japanese equities had a weak start to the year, we expect
that the expansive policy mix in Japan will help equities to perform well in 2017.
Central banks
At its 19 January meeting the ECB changed its policy
stance. The ECB left key interest rates unchanged and
confirmed that it expects rates to remain low or even
fall lower for an extended period of time. It also confirmed its plan to reduce its asset purchase program
(APP) from EUR 80 bn per month to EUR 60 bn as of
April 2017. The APP will continue at least until December 2017.
In our view, the USD will rather stay on the strong side
due to the above-mentioned political risks in Europe,
and divergence of monetary policies. The interest
rate differential of 200 basis points makes it very expensive to short the USD.
Likewise, the January US Fed meetings did not surprise markets. There was no change in interest rates
and the outlook of the Fed remains balanced. The
market currently discounts two rate hikes in 2017.
–3–
IMT Asset Management AG
Investment Outlook 02.2017
ECONOMICS
PMIs continued to rise in January, confirming the
global growth recovery. Also, inflation rates rose, due
to strong base effects resulting from commodity
prices. US non-farm payrolls rose by 227,000 in January vs. 157,000 in December, confirming continued
robust job creation in the US. Average hourly earnings
rose 2.5% year-on-year and, therefore, a bit less than
in the previous month (2.8%).
Fig. 1: PMIs
Fig. 2: PMIs
60
60
55
55
50
50
US
45
12/14
EMU
Japan
Switzerland
12/15
45
12/14
12/16
Fig 3: Consumer price inflation, in % YoY
China
12/15
12/16
Fig. 4: Consumer price inflation, in % YoY
4.0
3.0
2.0
2.0
1.0
0.0
0.0
-1.0
-2.0
12/12
US
EMU
12/13
Switzerland
12/14
12/15
-2.0
12/12
12/16
Fig 5: Unemployment rates, in %
Japan
12/13
China
12/14
12/15
12/16
Fig 6: US labor market
14
3.0
12
600
Avg. hourly earnings, % YoY, lhs
Chg. US non-farm payrolls, '000, rhs
10
8
2.5
400
2.0
200
6
4
2
0
12/12
US
12/13
EMU
12/14
Switzerland
1.5
12/12
12/15
–4–
0
12/13
12/14
12/15
12/16
IMT Asset Management AG
Investment Outlook 02.2017
FIXED INCOME
US 10-year yields stabilized in January, while European yields rose 23 basis points. Yield differentials at
the short end of the curve have widened substantially
in recent months. The 2-year yield spread is about
200 basis points. Break-even inflation rates continued
to rise, in line with the reflation theme. Credit spreads
remained quite stable in January.
Fig.7: 2Y government bond yields
Fig. 8: 10Y government bond yields
2.0
4.0
US Treasury
Bund
Swiss
US Treasury
Bund
Swiss
3.0
1.0
2.0
0.0
1.0
-1.0
-2.0
12/12
0.0
12/13
12/14
12/15
-1.0
12/12
12/16
Fig 9: 10Y break-even inflation
12/13
12/14
12/15
12/16
Fig. 10: Credit spreads, 5Y credit default swaps
3.0
600
2.5
2.0
High Grade
High Yield
400
1.5
1.0
200
0.5
0.0
12/12
US
German
12/13
12/14
12/15
0
12/12
12/16
Fig 11: Money market spreads (3M-2Y)
12/13
12/14
12/15
12/16
Fig 12: Merrill Lynch volatility index
1.0
140
FI volatility
120
0.5
100
0.0
80
-0.5
-1.0
12/12
60
US
12/13
Euro
12/14
Swiss
12/15
40
12/12
12/16
–5–
12/13
12/14
12/15
12/16
IMT Asset Management AG
Investment Outlook 02.2017
EQUITIES
Equity markets started the year with good performance. Emerging markets outperformed, followed by
the US equity market. European and Japanese equities underperformed and ended the month even with
a loss. Energy stocks gave back some of their gains
while financials continued to profit from expected US
deregulation. Among emerging markets, The Brazilian Ibovespa and the Indian Nifty 50 index outperformed.
Fig. 13: MSCI equity indices – major regions
Fig.14: Equity indices – major developed markets
110
105
105
100
100
Developed markets
Frontier markets
Emerging markets
95
12/16
95
12/16
01/17
Fig 15: Equity indices – major emerging markets
115
110
CSI 300
Nifty 50
Ibovespa
Micex
-4
-2
0
2
4
Cons. disc.
Cons. staples
Energy
Finance
Health
Industrials
Inf. techn.
Material
Telco
Utilities
01/17
Fig 17: Price-earnings ratios
35
01/17
-6
100
40
EuroStoxx50
SMI
Fig. 16: Sector performance, MSCI Europe, 2017
105
95
12/16
S&P500
Nikkei
Fig 18: Equity volatility – S&P500 VIX index
50
MSCI US
40
MSCI EU
30
VIX Index
30
25
20
20
10
15
10
12/12
12/13
12/14
12/15
0
12/12
12/16
–6–
12/13
12/14
12/15
12/16
IMT Asset Management AG
Investment Outlook 02.2017
ALTERNATIVE INVESTMENTS
Gold and industrial metals rose in January, while oil
prices fell slightly. REITS continued to be under selling
pressure. Listed private equity continued its strong
rally. Also, hedge funds had a good start into 2017.
The broad HFR hedge fund index gained 0.5% in January.
Fig. 19: Gold price, USD/oz
Fig.20: Oil price, USD/bl
1800
140
120
1600
100
1400
80
60
1200
40
Gold
1000
12/12
12/13
12/14
12/15
20
12/12
12/16
Fig 21: Bloomberg commodity indices
Oil - Brent
12/13
12/14
12/15
12/16
Fig. 22: HFRI hedge fund indices
120
130
100
120
Composite - Fund Weighted
Global Macro
Quant Directional
80
110
60
40
12/12
Composite
Industrial Metals
Agriculture
12/13
12/14
100
12/15
90
12/12
12/16
Fig 23: FTSE EPRA/NAREIT global index
12/13
12/14
12/15
12/16
Fig 24: LPX global listed private equity
2200
2400
Global REITS
2000
2200
1800
2000
1600
1800
1400
1600
1200
1400
12/12
1000
12/12
12/13
12/14
12/15
12/16
–7–
Global listed private equity
12/13
12/14
12/15
12/16
IMT Asset Management AG
Investment Outlook 02.2017
CURRENCIES
In January, the USD gave back some of its gains from
the strong movement in November and December.
This describes the USD development versus most major currencies. From end of October, as geo-political
uncertainties rose, the CHF appreciated versus the
EUR and has remained on the strong side. The SNB is
certainly not very happy with this movement but
shows little inclination to act against the recent appreciation.
Fig. 25: EUR-USD exchange rate
Fig. 26: GBP-USD exchange rate
1.80
1.40
1.70
1.30
1.60
1.50
1.20
1.40
1.10
1.00
12/12
1.30
EUR-USD
12/13
12/14
12/15
1.20
12/12
12/16
Fig 27: USD-JPY exchange rate
GBP-USD
12/13
12/14
12/15
12/16
Fig. 28: USD-CNY exchange rate
7.00
130
USD-CNY
120
110
6.50
100
90
USD-JPY
80
12/12
12/13
12/14
12/15
6.00
12/12
12/16
Fig 29: EUR-CHF exchange rate
12/13
12/14
12/15
12/16
12/15
12/16
Fig 30: USD-CHF exchange rate
1.30
1.10
1.20
1.00
1.10
1.00
0.90
EUR-CHF
0.90
12/12
USD-CHF
12/13
12/14
12/15
12/16
0.80
12/12
–8–
12/13
12/14
IMT Asset Management AG
Investment Outlook 02.2017
ASSET ALLOCATION
2017 started with a rally of risky assets. Especially
emerging markets and the equities in the pacific
area performed strongly. Within fixed income, government bonds clearly fell, while high-yield and
emerging-market bonds performed well. Interest-
ingly gold performed well despite a risk-on environment. European equities and REITS underperformed. The EUR was rather weak, it appreciated,
however, against the USD and the GBP.
Fig. 31: Performance of major asset classes, based on our EUR portfolio strategy
-4%
-2%
0%
Fixed Income
Cash, EUR
Europ. Government, EUR
Inflation-linked, EUR
Investment grade, EUR
Insurance-linked, USD
High yield, LC
Emerging markets, USD
Emerging markets, LC
Convertibles
Convertibles, EUR
Equities
MSCI Europe, LC
MSCI US, USD
MSCI Japan, JPY
MSCI Pacific, ex JP, LC
MSCI Emerging Markets
Alternatives
REITS, developed markets, LC
Hedge Funds Index (HFRX)
Bloomberg Commodities, USD
Gold, USD
Currencies vs EUR
USD
GBP
CHF
NOK
SEK
JPY
AUD
YTD
January
–9–
2%
4%
6%
IMT Asset Management AG
Investment Outlook 02.2017
RISK MONITOR
The risk monitor continues to indicate moderate
market risks. Inflation and monetary tightening
risks have increased recently. Also equity valuations remain elevated. However, growth risks
clearly fell, as global PMIs improved in recent
months.
Fig. 32: IMT Risk Monitor
Systemic
Inflation
Monetary tightening
Growth
Implied volatility
Equity valuations
31-Jan-17
7-Oct-16
Credit
15-Feb-16
– 10 –
Low risk score: 1
Max risk score: 10
IMT Asset Management AG
Investment Outlook 02.2017
DISCLAIMER
This document is for information purposes only and
is not a solicitation of an offer or a recommendation
to buy or sell any investment instruments or to engage in other transactions. This document contains
data and information which are prepared by IMT Asset Management AG. Although IMT Asset Management AG takes care to ensure that the information in
this document is correct at the time it was collected,
IMT Asset Management AG neither explicitly nor implicitly provides any assurance or guarantee of accuracy, reliability or completeness, and assumes no liability or responsibility for either its own or for thirdparty publications. IMT Asset Management AG is not
liable for any direct, indirect or incidental loss incurred on the basis of the information in this document and/or on the risks inherent in financial markets. Investment in financial products should be done
only after carefully reading the relevant legal requirements, including sales restrictions or any other risk
factors. Any opinions represented in this document
solely reflect those of IMT Asset Management AG or
specified third-party authors at the time of publication (subject to modifications). The services mentioned in this document are addressed exclusively to
clients of IMT Asset Management AG.
Source for all graphs: Bloomberg, IMT Asset Management AG.
– 11 –