May was election month. If the outcome of the presidential elections in France was widely anticipated, the results in Greece were much more of a surprise.. ………..
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May was election month. If the outcome of the presidential elections in France was widely anticipated, the results in Greece were much more of a surprise.
No government was formed and new elections are planned for June 17th. The rise of the extreme left, unwilling to adhere to austerity commitments made with the Troïka, increases the risk of Greece exiting the euro zone. The consequences of such a move are difficult to predict. In addition, the recapitalisation problem for Spanish banks has resurfaced this past month. These uncertainties explain that the equity downturn that began in April has persisted throughout May and even stretched to all world regions. At the same time, weak economic data disappointed investor expectations. The resulting flight to quality brought the German and US 10-year yields to new historical lows, with the trend accelerating at the end of the month. Whereas the Spanish and Italian yields were up again, French bonds were seen as a relatively better quality investment and yields also fell to extremely low levels.
No government was formed and new elections are planned for June 17th. The rise of the extreme left, unwilling to adhere to austerity commitments made with the Troïka, increases the risk of Greece exiting the euro zone. The consequences of such a move are difficult to predict. In addition, the recapitalisation problem for Spanish banks has resurfaced this past month. These uncertainties explain that the equity downturn that began in April has persisted throughout May and even stretched to all world regions. At the same time, weak economic data disappointed investor expectations. The resulting flight to quality brought the German and US 10-year yields to new historical lows, with the trend accelerating at the end of the month. Whereas the Spanish and Italian yields were up again, French bonds were seen as a relatively better quality investment and yields also fell to extremely low levels.
As a result, from April 26th to May 30th, the S&P 500 and the MSCI EM (in local currency) are respectively down by -6.2% and -6.8%, while the Nikkei and Eurostoxx 50 fall -9.7% and -8.9%. US 10-year yields ease 32 bp to 1.61%, while the equivalent bonds in Germany shed 41 bp at 1.27%. Whereas gold did not benefi t from this renewed market tension, and actually dropped in value over the course of the month, the dollar rose 7% compared to the euro, reaching 1.24.
Last month, we had kept a positive score on the Euro zone, as we believed the situation was dif erent to a year ago. However, due to the resurgence of problems in Greece and the dii culty in fi nding a solution to the recapitalization of Spanish banks, we believe that for the coming weeks, upside and downside risk will be symmetrical on euro zone markets.
In all likelihood, June 17th will not provide any answers but will just be the start of a series of dii cult negotiations. With this in mind, we have reduced our score to neutral on this market.
However we are maintaining our positive scores on US and emerging equities. In the US, although economic data has seemed weak and indicative of sluggish growth, the fall back in oil prices does give consumers a little more room for maneuver and the property market is continuing to shown encouraging signs.
However we are maintaining our positive scores on US and emerging equities. In the US, although economic data has seemed weak and indicative of sluggish growth, the fall back in oil prices does give consumers a little more room for maneuver and the property market is continuing to shown encouraging signs.
At company level, Q1 earnings turned out better than expected, with over 70% of corporate groups reporting earnings in excess of expectations. Broadly speaking, companies are also showing improved confi dence in their outlook.
Emerging countries are still enjoying strong growth. Even if the slowdown is confi rmed in China, the government is providing subtle and carefully targeted measures to ensure a soft landing. After the severe fall on Asian markets and particularly in China, we are returning to a positive score on this region which should benefi t from lower oil prices. We are consequently lowering our score on Latin America.
Unlike April, the dollar benefi ted from this increased risk aversion. We are maintaining our position on the dollar as a safe haven, in view of potential rising tension on the European political scene.
On the bond side, we have maintained our negative bias on US and German sovereign yields. 2-year rates in Germany have fallen to 0.01% and the risk seems increasingly asymmetrical. As explained above, we prefer to stick to our position and reduce our score to neutral on euro equities, considering the level of correlation between sovereign yields and equity markets. We are reducing our exposure to high-yield and convertible bonds in the euro zone. Although these
market segments have shown great resilience, stronger risk aversion could cause them to consolidate further.
market segments have shown great resilience, stronger risk aversion could cause them to consolidate further.
In the name of caution, our portfolios continue to include a number of positions in gold or gold mines; these stocks have not yet benefi ted from the return of a risk of mode, but seem to be unfairly valued.
Disclaimer:
The data, comments and analysis in this bulletin refl ect the opinion of the Edmond de Rothschild Group and its affi liates with respect to the markets and their trends, regulation and tax issues, on the basis of its own expertise, economic analysis and information currently known to it. However, they shall not under any circumstances be construed as comprising any sort of undertaking or guarantee whatsoever on the part of the Edmond de Rothschild Group or its affi liates. All potential investors should consult their service provider or advisor and exercise their own judgement on the risks inherent to each UCITS and their suitability to the investors’ own personal and fi nancial circumstances. To this end, investors must acquaint themselves with the simplifi ed prospectus that is provided before any subscription and available at www.edram.fr or from the head offi ce of Edmond de Rothschild Asset Management. Data in this document is not contractual nor has it been certifi ed by the auditors. This document is for information only. Figures refer to previous years. Past performance is not necessarily a guide to future returns.
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