AXA WF Defensive Optimal Income

New year, new issues. The epidemic currently plaguing China could have a significant impact on Chinese activity. Donald Trump’s policy is and will remain unpredictable as exemplified by the repeated trade threats made against certain European countries. Eurozone growth figures for Q4 surprised on the downside, whereas the European Union and the UK said goodbye to each either prior to the official Brexit date. In the US, Q4 activity remained stable at +2.1% quarter-on-quarter annualised. During January, the flash PMI for the manufacturing sector fell to 51.7, whereas that in services climbed to 53.2. The United States has also finalised the so-called Phase 1 of the trade agreement with the Chinese authorities. Under the terms of this agreement, China will have to buy more US products, whilst the US has pledged not to increase import tariffs any further. That said, no major progress was made in terms of intellectual property rights and technology transfers. Donald Trump triggered a targeted assassination in Iraq, of Qassem Soleimani, a leading dignitary and influential person in the Iranian regime, reviving fears of renewed tensions in the region, even though these had calmed somewhat at end-January. In the eurozone, growth in Q4 stood at 0.1% quarter-on-quarter. The German manufacturing industry has continued its recovery with the Flash Manufacturing PMI rebounding to 45.2. While in France, the service sector has suffered as a result of the strikes, also reflected in the Flash PMI, which fell to 51.7. Household confidence has held steady despite a further drop in the unemployment rate, which now stands at 7.4%, its lowest level since May 2008. News was not so rosy on the credit front. The results of the Bank Lending Survey published by the ECB showed that forecasts for company loan requests are at their lowest since 2013 and credit data signals a slowdown in the pace of loans to non-financial companies (+3.2%). During its last monetary policy meeting, no changes were made and the details of the strategic review remain vague. In the UK, the divorce with the European Union was made official on 31 January. An 11-month transition period has started. During it, new trade agreements will be negotiated. Activity was slower during the last quarter of the year, affected by the decline in industrial production and significant inventory moves in October. Faced with this air pocket, some members of the Bank of England communicated their aim to reduce rates in a preventive move, but surprisingly, the institution finally decided to leave its rates unchanged. In China, economic activity in Q4 was higher than expected with GDP up 6% year-on-year. The services sector grew by +6.9% and the industrial sector, up +5.7%, held up well. Data from the latest survey point to a slight rebound in manufacturing activity, which has been called into question following the outbreak of the coronavirus (2019-nCoV) epidemic. However, it is difficult to quantify exactly its impact on business, though consumption and production will surely be sluggish in several regions. In Japan, Q4 growth is set to have plunged following the rise in VAT in October and the spate of extreme weather conditions. A slight rebound in activity was expected in Q1 but the coronavirus epidemic, combined with the extension of holiday periods during the Chinese New Year are bound to impact Japanese economic activity. Uncertainty concerning the coronavirus epidemic and its impact on global growth took a toll on equities markets in January. In the US, after a good start to the year, the S&P 500 shed all of its gains and ended 0.2% lower. Other markets were more harshly affected. The Euro Stoxx 50 was down 2.8% and the British FTSE 100 plummeted 3.4% in the run-up to Brexit. In Asia, the Japanese Topix lost 2.1% and the Chinese markets corrected more harshly: -6.7% for the Hong Kong Hang Seng index whereas the Shanghai index only lost 2.4% given the closure of the stock market for the New Year holidays. Emerging markets (MSCI EM Total Return) also incurred sharp losses, falling 4.9% in USD and -3.4% in EUR. Sovereign bonds made the most of risk aversion and accommodative monetary policies. 10-year US yields plummeted 41 basis points to +1.51%, while German Bund yields were down 25bp to -0.43% and the 10-year French OAT fell 29bp to -0.18%. Bond yields in peripheral countries joined them with 10-year yields plummeting to +0.23% (-24bp) in Spain and +0.93% (-48bp) in Italy. The same trend was seen in the UK where Gilts ended at +0.52% (-30bp) and 10-year Japanese rates also fell to -0.07% (-6bp). On credit markets, spreads widened slightly in the investment grade category but deteriorated more sharply in the high-yield segment. On the foreign exchange market, the US dollar notched up slightly against the euro to 1.11 (+1.1%), as did the yen (+1.3%), sterling (+0.7%), and the Swiss franc (+1.42%). In contrast, currencies related to commodities were in sharp decline: -3.7% for the Australian dollar and -3.5% for the Norwegian krona. In commodities markets, the Bloomberg Commodity index excluding farming and livestock was down 8.1% in reaction to uncertainty in China and hence on global growth. Oil prices plummeted 15.2% to $56/b for Brent crude. Industrial metals also suffered from the prospect of a decline in Chinese demand, as shown by the 10% fall in copper prices, whereas gold made the most of its refuge stock status, gaining 4%. Portfolio life and allocation views: In terms of allocation, our exposure to equities markets decreased to around 24% at the end of the month. Indeed, within the equities segment, we reduced our exposure by 2% to emerging equities, by 5% to US equities in view of the coronavirus outbreak and the US Democratic primaries. Upstream we bought optional protection on European markets for around 4.5% of the fund’s assets. On the bond market, we are maintaining relatively low sensitivity to interest rates, close to 2 years at the portfolio level, with primary exposure to bonds on the credit market to take advantage of a yield premium compared with the sovereign bonds market. Over the month, the fund posted a net performance of -0.71%. The current market sentiment is quite optimistic. Unquestionably, a number of areas of concern remain, in particular with regard to the coronavirus, the U.S. presidential elections, trade, low capital spending, high corporate debt and geopolitical risks. But the general trend seems to be tilting towards risky assets. Indeed, it is striking to note that the coronavirus outbreak, which has cast a doubt over the global growth outlook, led to a brief aversion to risk assets, but equity markets recovered very quickly. Similarly, on the night that Iran launched its ballistic missiles at a US base in Iraq, S&P 500 futures briefly lost 2% but quickly rallied to close the session higher. Under normal circumstances, these situations would have triggered a stronger reaction in the markets due to the fact that long positions in U.S. equity futures are now close to historical highs, a sign of tight speculative positioning. So why have the markets been proving to be so resilient? In our view, it is simply because for the time being positive factors are winning out. Monetary stimulus mechanisms continue to be shored up and financial conditions are becoming ever more accommodative as central banks continue to cut interest rates, most recently in China to cushion the effects of the coronavirus outbreak on the economy, and China has announced significant injections of liquidity. As a result, short-term rates, which are 50 bps lower than a year ago, continue to decline globally. The monetary stimulus is driving up asset prices, particularly for equities and real estate. For example, U.S. housing starts in December exceeded the expectations of all economists and reached their highest level since December 2006. Paradoxically, the rise in asset prices could become self-sustaining, since the increase in household net worth is likely to support consumption and, therefore, GDP growth in 2020 in a context where business results remain encouraging. All this against a backdrop where we can already hope for a recovery in the manufacturing cycle, as suggested by the rebound in business survey data. Consequently, the overall PMI indices for new orders in the manufacturing sector for January have returned to above 50, the highest since December 2018. According to historical statistics, the S&P index is likely to continue its rise until a recession is in sight. However, this is still not in the offing just yet.