AXA WF Global Income Generation

January 2020 The coronavirus epidemic, currently raging in China, could have a major impact on the Chinese economy. Meanwhile the European Union and the United Kingdom said "goodbye" to each other ahead of Brexit’s entry into force. In the United States, activity in the fourth quarter remained stable at +2.1% quarter-on-quarter on an annualised basis. The latest surveys once again conveyed a mixed message. In January, the Flash PMI in the manufacturing sector moved lower at 51.7, whilst the Flash PMI in services surprised to the upside at 53.2. In this context, the Federal Reserve did not modify its monetary policy, leaving its key interest rates unchanged. Meanwhile, the United States finalised the “phase one” agreement with the Chinese authorities which stipulates that China will have to buy more American products while the United States undertakes not to increase its customs duties. In addition, the White House launched a targeted assassination of Qasem Soleimani, an influential personality within the Iranian regime, awakening fears of a renewed rise of tensions in the region, even if these calmed down somewhat by the end of January. In the euro zone, fourth-quarter growth amounted to +0.1% quarter-on-quarter. According to the latest surveys, German manufacturing industry continued its recovery - the Flash PMI rebounded to 45.2 - while in France the services sector suffered from strikes, as shown by the Flash PMI which fell to 51.7. Euro zone household confidence remained stable despite a further fall in the unemployment rate. The news worsened on the credit side with the results of the Bank Lending Survey published by the ECB showing that expectations for business loan applications reached their lowest level since 2013. At its last monetary policy meeting, there were no new policy measures and the details of the strategic review remain vague. In the United Kingdom, the divorce with the European Union became official at the end of January. This will be followed by an eleven month transition period during which new trade agreements will be negotiated. Activity weakened in the last quarter of the year, negatively impacted by a drop in industrial production and strong stockpiling in October. Faced with this sudden slowdown, some members of the Bank of England communicated their willingness to cut rates preventively but the MPC surprised observers by deciding to leave rates unchanged. In China, economic activity in the fourth quarter was better than expected, with year-on-year GDP growth of +6%. Over the past year, the services sector, which expanded +6.9%, was largely responsible for this solid performance but the industrial sector also held up relatively well (+5.7%). The latest survey data pointed to a slight rebound in manufacturing activity, although we are certain that this rebound will not take place. Indeed, following the Coronavirus epidemic, some cities have been forced to adopt quarantine measures and close production sites. Although it is difficult to quantify exactly how the epidemic will affect business, certainly consumption and production will be sluggish in several regions. In Japan, growth in the fourth quarter is expected to decline sharply following last October's VAT hike and severe weather conditions. A slight rebound in activity was expected in the first quarter, but the fall-out from the coronavirus epidemic will definitively impact Japanese economic activity. The undoubtedly negative impact of the coronavirus outbreak on global growth as well as the uncertainty surrounding the epidemic weighed on equity markets in January. In the United States, the S&P500 index began on a strong note but gave up all its gains to end the month flat (-0.2%). Other markets were harder hit. The Eurostoxx 50 declined -2.8%. In the United Kingdom, the FTSE 100 dropped -3.4% as Brexit loomed. Asian markets also reacted negative with Japan’s Topix decreasing -2.1%. Chinese markets corrected even more sharply as indicated by the Hong Kong Hang Seng index which plummeted -6.7% whilst the apparent resilience of the Shanghai index, which dropped merely -2.4%, was due to the exchange being closed for the New Year holiday in the last week of January. Emerging markets (MSCI EM Total Return Index) also dropped sharply down -4.9% in USD compared to -3.4% in EUR. Sovereign bond markets benefited from mounting risk aversion and ongoing accommodative monetary policies. US 10-year yields dropped 41 bps to 1.51%. German 10 year Bund yields also moved 25 bps lower to -0.43% and French 10-year OAT yields decreased 29 bps back into negative territory at -0.18%. Peripheral country bond yields followed suit with Spanish 10 year yields dropping 24 bps to 0.23% while Italian 10-year BTP yields declined even more steeply (-48 bps) to 0.93%. The yield on 10 year British Gilt also decreased 30 bps to +0.52%. Japanese 10 yields declined modestly (-6 bps) to -0.07%. With regards to credit markets, corporate Investment Grade credit spreads moved marginally higher on either side of the Atlantic but widened significantly for both European and US High Yield. With regards to currency markets, the US dollar appreciated slightly as indicated by the dollar index which increased +1%. The Euro declined -1.3% to 1.11 and the British pound marginally weakened -0.5% to 1.32 while the Japanese Yen was stable at 108 against USD. Commodity currencies suffered the most with the Canadian dollar down -2% to 1.32 and the Australia dollar slumping -4.7% to 0.67. On commodity markets, the Bloomberg Commodities Index excluding agriculture and livestock fell -8.1% in reaction to concerns over Chinese and thus global demand. Oil prices dropped -15.2% to $56 a barrel whilst WTI decreased -15.6% to $51. Industrial metals also suffered from the prospect of weaker Chinese demand, as indicated by the Copper price dropping -10%, while Gold benefited from its safe haven status moving +4% higher to $1,583 an ounce. The equity allocation for the strategy was slightly reduced in the month through a sale of equity index futures contracts. However, the overall risk was reduced more significantly through the purchase of sell options on the Eurostoxx 50 index with strike for March and April. The sensitivity of the options reduced the overall exposure as equity markets sold off. The reasoning to buy protection was informed by risks surrounding the US presidential campaign and in particular the Democrat Party nomination contest that could produce a candidate that markets would perceive negatively in the short run. Nonetheless the sharp move lower at month end was driven by fears surrounding the China virus. The ETF position on Europe Oil and Gas sector equities (1%) and overweight on Emerging Market equity indices were also liquidated at month end specifically due to said fears. The duration position of the portfolio was stable over the month as market yields for core government bond markets moved lower yet remain elevated should the negative risk scenario surrounding the activity shutdown in China prove to be the case. At month end, the duration position was thus 4% above that of the long-term strategic level. No other changes were made to the underlying allocation choices thus maintaining the diversification exposure to inflation breakeven pricing, high yield bonds and emerging market bonds through short duration strategies. The equity allocation for the strategy was slightly reduced in the month through a sale of equity index futures contracts. However, the overall risk was reduced more significantly through the purchase of sell options on the Eurostoxx 50 index with strike for March and April. The sensitivity of the options reduced the overall exposure as equity markets sold off. The reasoning to buy protection was informed by risks surrounding the US presidential campaign and in particular the Democrat Party nomination contest that could produce a candidate that markets would perceive negatively in the short run. Nonetheless the sharp move lower at month end was driven by fears surrounding the China virus. The overweight on Emerging Market equity indices was also liquidated at month end specifically due to said fears. The duration position of the portfolio was slightly reduced over the month as market yields for core government bond markets moved lower yet remain elevated should the negative risk scenario surrounding the activity shutdown in China prove to be the case. At month end, the duration position was thus 5% above that of the long-term strategic level. No other changes were made to the underlying allocation choices thus maintaining the diversification exposure to inflation breakeven pricing, high yield bonds and emerging market bonds through short duration strategies. The fund currently is positioned with an 84% allocation to income generating assets and 17% to long term growth strategies.