AXA WF Defensive Optimal Income

October was marked by a slight return to optimism linked to a possible resolution to Brexit and a reduction in the risks linked to the trade war. In the United States, the manufacturing sector continues to cause concern and this is beginning to be felt in real data, even though GDP growth for Q3 is stable at 1.9% quarter-on-quarter (QoQ) annualised, thanks to robust household consumption. The ISM PMI dropped to 47.8 in September, its lowest since 2009. The services sector also dropped to 52.6 in September, its lowest since August 2016. We can also see a downturn in job creations, with a current rate of 160,000 net creations per month vs. 220,000 in 2018. The Trump administration also announced that it will postpone the 5 pp increase on imports of Chinese products in exchange for certain measures in favour of US companies. With regard to the impeachment proceedings against Donald Trump, the House of Representatives officially approved the launch of an investigation. Finally, the Fed decided on a further cut of 25bp to its key rates [1.50%-1.75%] but indicated that it would require a significant deterioration in the economic environment for them to drop again in December. In the eurozone, GDP growth was stable at +0.2% QoQ. France and Spain held up quite well against the slowdown in global activity (+0.3% and +0.4% respectively) and Italy exceeded expectations with 0.1%. The figure for Germany will be published mid-November (we expect to see zero growth). October’s flash PMI surveys for the eurozone indicate that activity is stabilising. As might be expected, the ECB left its monetary policy unchanged at its October meeting, without providing any more details. In Italy, political turmoil is once again the order of the day. The new 5-Star Movement (M5S)-Democratic Party coalition suffered a severe defeat at the regional elections. In Spain, the imprisonment of nine Catalan separatist leaders for sedition, embezzlement of public funds and disobedience sparked widespread demonstrations in Catalonia. In the United Kingdom, a new agreement was reached with the European Union but it could not be approved before the deadline of 31 October. Boris Johnson was therefore forced by Parliament to request an extension, which was granted by the EU until 31 January. Finally, he called an early general election for 12 December. Currently the polls indicate that the Conservatives are clearly in the lead. In Japan, the impact of the increase in VAT on 1 October seems to have been less significant than in 2014, helped along by compensation measures from the government. However, activity is likely to drop automatically in the 4th quarter after the steep rise in consumption during September (early purchases). Finally, the BoJ decided to maintain its ultra-accommodative policy but opened the door to a possible increase in interest rates. In China, GDP growth for Q3 fell to 6% YoY, its lowest for more than three decades. The manufacturing sector, affected by the trade war, is at the root of this slowdown in activity. At a domestic level, activity stood up better, supported by accommodative policies (fiscal and monetary). Despite a number of positive elements in the short term, the trend is still showing a continued slowdown. In this situation, we believe that the government should not be taking any risks and increase its monetary easing policies. The stock markets recovered in October, with trade tensions easing and no more negative surprises in terms of macroeconomic data. In the United States, the S&P 500 gained +2% and in Europe, the EURO STOXX 50 gained +1% with the various countries posting mixed performances: the DAX jumped +3.5% while the CAC gained only +1%. The peripheral markets also went their separate ways, with the MIB in Italy increasing +2.7% while the IBEX in Spain remained stable (+0.1%). In the United Kingdom, the FTSE 100 dropped -2.2% in response to the strong recovery in the pound sterling after the expiry of the Brexit extension. The Asian markets reacted very positively to a possible ceasefire in the trade war, with the Japanese indices Nikkei and TOPIX jumping +5.4% and +5%. In China, the Hang Seng in Hong Kong gained +3.1% while the Shanghai composite index advanced +0.8%. Emerging markets (MSCI EM Total Return Index) also made progress, gaining +4.2% in USD and +1.8% in EUR. Most of the bond markets lost some of their recent gains in the face of economic data that were in line with or better than expectations. The Fed’s resolutely accommodative tone allowed the 10-year US yield to remain stable at 1.7% and the yield on the 10-year Bund moved to -0.41%. Likewise for the yield on the 10-year OAT, which moved to -0.1%. Yields on the 10-year Italian BTP and Spanish Bonos also progressed, reaching 0.9% and 0.2% respectively. The yield on the 10-year UK Gilt increased to +0.63%. Likewise, the yields on the 10-year Japanese JGBs reached 0.1%. On the credit market, yield spreads were close to stable for the IG segment but diverged for the HY segment with a narrowing in the United States and a slight widening in Europe. On the foreign exchange market, the US dollar weakened, as indicated by the dollar index, which dropped -2%. The euro gained +2.23% to 1.09 and the pound sterling jumped +5.3% to 1.29 vs. the dollar; the Japanese yen remained almost stable (+0.2%) at 108. On the commodities market, the Bloomberg Commodity ex-Agriculture and Livestock index gained +2.1% thanks to the level of optimism aroused by the easing of tensions on the trade front. Oil prices increased (Brent +2% to $60 per barrel, although WTI was stable at $54) as did industrial metals prices, and copper posted a slight gain (+1.2%). Gold also increased, gaining +2.6% to reach a little more than $1,500 per ounce. In terms of allocation, our exposure in equities markets increased to around 26.11%, broken down as follows: 4.95% in the United States, 10.36% in the eurozone, 2.30% in Europe outside the eurozone, and 3.04% in Asia (including 0.97% in Japan). Our equities allocation now represents 21.00% of the portfolio and is partially hedged on the eurozone and the United States. Our exposure in equities in the European banking sector is around 1.22%. In the equities allocation, we took positions on value and cyclical stocks in the sectors/industries that have suffered relative to the rest of the market. Despite sector rotation, there is still a record level of divergence between value/cyclical stocks on the one hand, and equities with low volatility/defensive stocks, on the other. Against this background, we opened a relative 1% position in the industry and cyclical consumer goods sectors in the United States. In an environment of low interest rates and extremely low credit spreads, and with central banks seeking to continue their policies of monetary easing, we have decided to add positions on sectors that generate high dividends. We have therefore opened a relative 1% position in the energy and telecommunications sectors respectively in Europe. On the bond market, modified duration is still relatively low even though it increased as a result of investments on the credit market in recent months, to take advantage of a yield premium compared with the sovereign bonds market. The allocation in investment grade credit now represents around 47.74% of the portfolio. The allocation in high yield credit was maintained at around 3.00% of assets with a preference for the European market. We maintained our diversification on the fund AXA IM WAVe Cat Bonds, which represents 0.55% and we added the fund AXA WF Multi Credit for 0.76% for diversification purposes and to take advantage of this fund's entire credit spectrum. The allocation in emerging markets bonds denominated in USD and EUR was reduced during the month, to take profits. We also increased our long position on inflation expectations in the eurozone to 6.5% of the portfolio, given the current levels. We also opened a long position on inflation expectations in the United States for 3.5%. The fund is principally exposed to the euro. However, we added a carry position via a long position on the Canadian dollar and short on the Swiss franc for 1%, as well as a long position on the Canadian dollar and short on the US dollar, also for 1%. In fact, another month of exceptionally strong growth in employment, the low unemployment rate and the increases in wages could allow the Bank of Canada to maintain its interest rates unchanged between now and the end of the year, which could support the Canadian dollar. When we implemented this position, we were expecting to see further interest rate cuts from the Fed. There was one at the end of October, but the Fed seems to be taking a breather. However, we still believe that this position may appreciate over time. Moreover, to respond to the increase in the Swiss franc in an environment of rising risk sentiment, the SNB could now be prepared to defend its currency in the face of the deterioration in Swiss fundamentals. Our position on money products was increased and now represents around 5.26%. Over the month, the fund posted a net performance of +0.47%.