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Macroeconomic outlook
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EuroBusinessMedia (EBM): What are your core macro-economic assumptions looking ahead?
Marie-Pierre Peillon: The macro-economic outlook for 2012 and 2013 takes into account the significant deterioration in the global environment over the past half-year, with a low in 4th Quarter 2012. As to the United States, we have had some good news – for instance, regarding the real estate market, which has really picked up – but also some bad news, specifically about the job market, with job creation once again in a slump. The United States is also affected by the slow-down in the Euro zone. As a result, we anticipate soft growth in the United States. China is also affected by the slow-down in the Euro zone, and the Chinese government has instituted a mini-stimulus plan, which bears no relation to that of 2008, but will, in our opinion, enable a “soft landing” in 2012 and 2013. The dangers lie, of course, in the Euro zone, especially Italy and Spain, both of which are posting disastrous figures, in terms of investment, household consumer activity and the job market. We are relatively pessimistic on this front and foresee a recession in the euro zone in both 2012 and 2013.
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European debt crisis
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EBM: Do you feel that the risks resulting from the European debt crisis will soon be brought under control?
Marie-Pierre Peillon: Our central scenario is based on the idea that European policy-makers will agree to postpone the budgetary adjustments asked of European countries. This is a vital necessity if we are to overcome the Euro zone crisis. In this sense, the 28 June summit was a first step as it started laying the foundations for banking union. We need to take the banking union one notch higher, but also need to talk about budget integration and a much more dynamic growth plan. By doing so, we feel that risks could be completely dissipated; otherwise, we run the risk of lapsing into an extended crisis in the Euro zone again. However, we also need to remember that there is a risk in the United States, around the so-called “fiscal wall”. An agreement needs to be reached by the end of the year between the newly-elected American government and the Congress on budgetary restriction measures. There is talk of USD 500 billion in total, or 3.5% of the US GDP. We believe that an agreement will be signed between the two parties, so that it can support American growth and, subsequently, global growth.
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Central banks
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EBM: You pointed out the role of political decision-makers in the current crisis, but what about that of the monetary authorities?
Marie-Pierre Peillon: We feel that monetary policy, whether with respect to the FED or the ECB , will remain supportive, with another 0.25 BP drop in interest rates at theECB , and possibly quantitative easing – though this is not a foregone conclusion. Most importantly, while monetary policy has played a large part in mitigating the current crisis, it remains vital, as Mr Dragui keeps reminding us, that policy makers play their part too.
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European sovereign bonds
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EBM: What are your market views on European sovereign bonds today?
Gaëlle Malléjac: Until the European authorities take much more decisive action, we will continue to be impaired by a lack of visibility, which will in turn keep rates low, in particular in “core” countries like Germany, meaning around current market levels. Where peripheral debt is concerned, the pressure on these countries’ risk premiums is expected to remain the same as well, primarily due to their ratings levels and primarily in Spain, which is on the threshold of a speculative grade rating. Our preference thus goes to “semi-core” countries, meaning those that offer a relatively attractive excess yield compared to German debt, but which still have high ratings.
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Credit
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EBM: What are your views on the credit asset classes?
Gaëlle Malléjac: On credit, we remain cautious overall. There are two sharply diverging viewpoints, depending on the geographic origin of debt issuers. We prefer issuers from “core” countries, meaning those from northern Europe, whatever their sector, and we prefer industrial debt over financial debt. We remain very cautious and factor in significant weighting on private issuers from peripheral countries in view of the current sovereign debt crisis.
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Equities
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EBM: What are your views on the equity asset classes?
Claire Chaves D’Oliveira: With regard to the equity markets, we are afraid that one crisis will only give way to another. We get the impression that, following the deepening debt crisis over the past 18 months, we are starting to see the global economic slowdown materialise visibly in companies’ results. These concerns have been quite prominent since the second quarter and materialised with an avalanche of profit warnings in June and early-July, across all sectors and all countries – whether in the United States or Europe, in consumer activity or industry, and for all customers, from Europe to China and the United States. This constitutes the bulk of the equity markets – our core business – and will have quite a negative effect, as company results will no longer be a solid foundation, as they had been for some months.
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Sectors
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EBM: What is your outlook by sector, against this backdrop?
Claire Chaves D’Oliveira: We have a bit of a problem when it comes to sectors, as the most cyclical stocks are scaring people away from equity, as they are very exposed to the global slow-down, and thus bear the full brunt of profit warnings, while very defensive stocks are extremely expensive. We have never seen such a large gap between the most defensive stocks, which are the most expensive, and the most cyclical ones, which are the least expensive, or what is known as “value” versus “growth”, in the Anglo-American world. There has never been such a valuation gap between expensive growth values and inexpensive cyclical values. As a result, we don’t know which way to lean, as we obviously don’t want to be too exposed to cycles in the middle of their slowdown, when the outlook is already relatively gloomy. We also don’t want to go after the most expensive stocks. So we pick and choose in the sectors, on both sides. We are looking for pharmaceutical companies, for instance, which have the same growth profile as the agro-food sector, but are still less expensive, or in technology or b-to-b, where there are many attractive stocks with a very convincing growth profile.
