2019 Big shifts ahead - Our convictions, your resolutions

2019 OUTLOOK: Which way will the wind blow?

For a few years now, international institutions, the IMF in particular, have been asking that the economic model focus more on sustainable and inclusive growth(1). Indeed, all G7 players are faced with the same mega-trends: ageing populations, technological breakthroughs (digital economy, artificial intelligence, …), the challenges of migration, and climate change. Governments and corporates alike have to double their efforts to maintain social cohesion and meet the climate emergency. Candriam, a pioneer in socially responsible investment for more than 20 years now, shares this view and considers that private enterprise – by its respect of social and environmental standards, and ability to innovate – can be both the drivers and agent of this change. The asset management industry, by monitoring existing good corporate practices and discovering added-value innovations, has a part to play. We are convinced that the transition will create a wealth of opportunities and innovative solutions that will add greater value to our economic model.

An ability to grasp these opportunities will be crucial in 2019, against a difficult economic background, in which there is a marked tendency for navel-gazing, and an ever more uncertain economic outlook. Market sentiment, currently highly cautious, is in sharp contrast to the enthusiasm with which 2018 was ushered in. And, undeniably, the global economy is facing powerful headwinds: trade and geopolitical tensions, tighter financial conditions in emerging markets, European uncertainties, …

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Candriam wishes you a bright 2019!

Our experts take the floor! Their wishes for 2019

It’s Saturday, so it must be Quiz Day!

Each Saturday in December, Candriam will be giving five people the chance to taste the local specialties of some of the countries in which Candriam has an office – France, Belgium, the Netherlands and Italy. The competition itself is a piece of cake: reply correctly to the 5 questions of the day and to the tie-breaker question before the following Saturday’s quiz.

And that’s not all! At the end of the month, the person to have correctly and most quickly answered (to deadline) all quiz questions will win the sustainable travel gift par excellence: an electric scooter!

Get typing!

Do you know the Client Servicing @Candriam?


Mergers and acquisitions: decorrelated performance drivers?

“IBM buys Red Hat for $34 billion.” “China’s Mascot Bidco Oy buys Finland’s Amer Sports.” “LVMH buys US luxury hotel owner Belmond."

Despite the spike in market volatility, mergers and acquisitions - especially prevalent in the oil, healthcare and tech sectors - continue to make headlines as 2018 draws to a close. While most of these announcements have been located in the US and often involved mid-cap companies, they represent attractive first-half 2019 investment opportunities for any investor.

After all, the value of target companies often climbs substantially: once the bid is locked in, the target’s share price is no longer associated with the company’s fundamentals but instead with newsflow related to the deal in progress. And since, historically speaking, 93% of mergers that are announced end up going ahead, they offer an opportunity for investments with high probabilities of success. That’s the whole idea behind “Risk Arbitrage” strategies, in fact: assuming little exposure to the markets while selecting deals that are most likely to be carried out.

Let’s look at a concrete example. In the wake of Belgium’s victory in the Hockey World Cup, consider the country’s favourite drink - beer - and compare the change in SAB Miller’s share price with the trend in the Euro Stoxx 600 when the company was bought out by world leader AB InBev. As shown in the chart below, SAB Miller’s share price ranged from a floor price, i.e. its value at the official announcement date, and a high point, i.e. the bid price. Ultimately, the share offered a projected return of 12% in a market that shed nearly 9% over the same period.

Looking at it that way, we clearly see the “raw” profit to be earned from an M&A deal. That leaves the timing of the investment and the risk that 7% of deals do not go through. So just how do you pick the “right” deals to build a solid portfolio? There are several possible approaches. At Candriam, this expertise lies in a balanced combination of quantitative and qualitative analyses that has successfully cut the uncertainty rate down by 50%.

Our quantitative analysis relies on a database created more than 10 years ago and now containing a history of some 5,000 M&A deals spanning the last 20 years. In other words, we are able to draw on a host of information and data to examine the main risk factors of a given deal, whether it involves a hostile takeover, a financial bid, a smaller buyer compared to the target, anti-trust considerations, etc.

Meanwhile our qualitative analysis is based in particular on the associated legal documentation, which we examine in order to identify the various clauses and components liable to jeopardise the success of the deal and to determine the secondary factors.

We are able to reduce the number of negative events by taking this twofold approach. It is the reason, for example, that we did not take part in the bid for Aixtron launched by China’s Fujian Grand Chip, having anticipated in particular that the US authorities would not allow the transfer of the technology used in US anti-missile defence systems. On top of that, we build a conservative portfolio, which helps minimise the impact of residual failures. The result is both a significant decorrelation and very well controlled volatility.

For investors, incorporating a merger arbitrage strategy in a diversified portfolio makes the portfolio more resilient to market fluctuations and improves its risk-reward ratio.

Why global growth can overcome concerns

Was it just a seasonal effect? In spring 2018, the general mood was still optimistic: the IMF had once again raised its global economic growth forecasts for 2018 and 2019. Fast forward to a few months later at the December G20 Summit in Buenos Aires, and optimism has flown the coop to be replaced if not with pessimism, then at least with caution. So just how did we end up here? And, more importantly, is global growth really under threat?

The first major source of concern stems from emerging countries, dependent on investment flows from the rest of the world: greater investor caution, combined with Fed interest rate hikes – making US risk free investments more attractive – has created an environment where the most vulnerable emerging countries (those with a current account deficit, high inflation and fragile public finances) are in a prime position to see a slowdown in growth. That said, while there may be some dramatic adjustments in store for these countries, the slowdown should be much less pronounced for the global economy: the combined weight of the really vulnerable emerging countries in global imports (see chart below) is only around 5%!

The US-China trade war is a much more serious risk for the global economy: China on its own represents 10% of the world’s imports, i.e. almost as much as the United States (13%). Of course, China is still a largely “administered” economy: the authorities have already announced credit easing measures (increased refinancing for corporate loans, establishment of a credit enhancement mechanism for bonds issued by struggling companies...). What’s more, a number of fiscal measures (notably some income tax cuts for households and some companies) should boost private-sector demand. The Chinese economy may have lost steam since summer 2018, but is far from having stalled!

Lastly, the US economy is in the midst of its longest expansion since post-WWII. The ISM composite index at 62 in November has once again outshone the most pessimistic of forecasts. The unemployment rate is back to its lowest level since the late 1960s and strong wage growth is still giving solid support to consumer spending. The increase in government spending decided by Congress will also fuel growth in 2019 keeping again the economy above potential in 2019.

Of course, Akerlof and Shiller famously said it best * : economic fluctuations are not only the result of rational decisions. “Animal spirits” – to borrow an expression from J. M. Keynes – also play a key role: if the uncertainty surrounding the trade war lasts too long, companies will end up postponing their investment and hiring plans.

Let’s hope the truce reached in Buenos Aires is not just an interlude.

* George A. Akerlof et Robert J. Shiller (2009), Les esprits animaux. Comment les forces psychologiques mènent la finance et l'économie, Ed. Pearson

The Sustainable Development goals: A panacea for investors?

Since 2015, the United Nations have adopted the SDGs (Sustainable Development Goals), a set of 17 objectives and 169 targets that aim to encourage sustainable development, in all fields of our society. But are they practically achievable, or an unattainable wish-list? Wim Van Hyfte, Global Head of Investments and Research, gives his take on this investment framework.

Think different to be different

  • Hey, François? It’s John. I’m calling you from my hotel in New York. My cellphone doesn’t work.
  • Hello, John, s … ugar! We still on for tomorrow? You land at CDG tomorrow morning around 9 a.m., yeah? I’m thinking of leaving Amiens around 10.
  • Copy that, François. See you tomorrow, bye for now, gotta dash.

So, as John had hung up without realising that he’d forgotten to specify the time and place of their meeting, how will our two friends get to see each other???

This year, we celebrate the second anniversary of the passing of Thomas Schelling, who won the Nobel prize Economics in 1995 for his game-theory research into conflicts and cooperation. The conversation above is inspired by one of his studies, which highlighted agents’ ability to coordinate (their “coordination capacity”) around a specific focal point. We are referring, in fact, to “Schelling’s concept of salience”. By this yardstick, our friends will, in all probability, bump into each other around midday at the Eiffel Tower, each of them having been assailed by the same doubts: where will he think I’m going? And when does he think I’ll get there?' 12 noon' and 'Eiffel Tower' are two salient points in terms of time and place.

Schelling’s input also extended to the economics of convention, i.e., to the study of relationships and coordinations between economic agents. Financial markets, as places where investors meet to do deals, can be seen as a super-lab for this branch of the economy.

They come as they are: with ideas, perceptions and emotions in tow, and their decisions to sell or buy assets because they have constraints and, above all, convictions. Indeed, each investor clings to their conviction: for some, this means an analysis of economic fundamentals, for others an analysis of stock market prices, while for the younger generation it means back tests and, for the older, intuition. They, too, will be highly influenced by focal points. Why? Because focal points are useful when we’re lost and because we are often plagued by doubt. As the analytical framework is unstable, the effectiveness of each approach/conviction will necessarily be limited in time whereas focal points will prove more stable: 1.15 for the EUR/USD and 3% for 10Y US yields, for example, for 2019.

Our investment approach comprises a combination of the different approaches mentioned above. We develop models, we back-test and integrate a mixture of fundamental and technical analysis. However, prior to investing, we systematically try to imagine just what could go wrong. We don’t study the variables but rather model residue, i.e., the residue of the hidden variables, those that will most influence asset price movements.

Another way of describing what we do is to mention behavioural finance, which, simply put, is an understanding of the behaviours that guide investors’ investment decisions. Consequently, our Global Macro management approach aims to capture the inefficiencies generated by excessive behaviours. Obviously, this type of finance is less formal than traditional academic finance, which is based on expected optimised returns. Although this kind of finance is more implicit than explicit, it lets us look at things from a different angle. We consequently get closer to real financial market rationality, that of all those men and women buying and selling assets, rather than the form of rationality that economists would like agents to adopt.

This investment process, when applied to equity index, bond index and currency universes, allows us to deliver a different and decorrelated performance, irrespective of the environment. It’s also one that we enhance on an ongoing basis, as we believe – yes, folks, we too have our convictions! – in a certain Darwinist approach to financial markets. You have to adapt to financial market evolutions. As JM Keynes so succinctly put it (and we leave the last word(s) with him):

It’s Saturday, so it must be Quiz Day!

Each Saturday in December, Candriam will be giving five people the chance to taste the local specialties of some of the countries in which Candriam has an office – France, Belgium, the Netherlands and Italy. The competition itself is a piece of cake: reply correctly to the 5 questions of the day and to the tie-breaker question before the following Saturday’s quiz.

And that’s not all! At the end of the month, the person to have correctly and most quickly answered (to deadline) all quiz questions will win the sustainable travel gift par excellence: an electric scooter!

Get typing!

Do you know the Responsible Investment @Candriam?


European equities: growth over value … or vice-versa?

In the last quarter of 2018, equity markets underwent significant sectoral rotation towards value stocks. What now lies in store for us in 2019? Geoffroy Goenen, Head of Fundamental European Equity, tells us what’s best: growth stocks … or value stocks.

Can Emerging Market Debt expect a recovery in 2019?

After two years of stellar performance, 2018 was a challenging year for Emerging Market Debt (EMD), with all sub-segments posting negative returns: EM Corporates (-2.9%), EM Hard Currencies Sovereigns (-6.5%), EM Local Currencies (-8.3%) and. EM Currencies (-9.6%).

The long list of headwinds (interest-rate differentials with the US, stronger US dollar, trade war, investor ouflows, …) from 2018 may not be repeated in 2019 and we are, therefore, cautiously optimistic on our EMD outlook for next year.

  • We expect the US economy to continue expanding in the first half of the year but to slow down in the second half as the effects of the fiscal stimulus wane and trade tariffs start hurting the US economy.
  • The Fed is likely to continue its tightening policy.
  • The US dollar is likely to reverse some of its 2018 gains as US growth divergence versus the rest of the world fades.
  • Eurozone growth will stabilize or at least its differential with US growth might not deteriorate further. Risks to this view are mostly political – Brexit resolution by March, Italian medium-term fiscal plans, ECB presidential transition in 1Q, European parliamentary elections in May.
  • The China growth slowdown will continue, ending up at just over 6% in 2019, versus around 6.5% for 2018. If the United States slaps a 25% customs tariff on all imports from China, $(504bn in 2017), that will cut China growth by around 1%. For the time being, however, we have the Buenos Aires truce. In addition, the Chinese government will not hesitate, if need be, to implement further fiscally supportive measures.
  • Commodity prices, including oil, will stabilize around current levels and stage a 0-10% recovery in 2019 on the back of demand support from Chinese fiscal stimulus and the re-establishment of supply constraints.
  • The US administration-driven trade tensions are difficult to forecast in the absence of a long-term target or exit strategy but are still likely to decline after the sharp escalation in 2018.
  • In this precarious environment, EM fundamentals remain broadly stable. EM growth is stabilizing around its 2018 level, with a larger dispersion between CEE and Asia, which is slowing down, and Latam, which is recovering on the margin. EM inflation remains subdued, on the back of output gaps and growth headwinds. EM debt sustainability metrics do not signal solvency issues in the near term. EM debt levels have deteriorated since the global financial crisis but the average EM public debt of 51% of GDP is still materially lower than the 100% of the GDP counterpart for DM. Total EM private debt is high: around 113% of GDP but, excluding China, the number drops to a more manageable 76% of GDP. China’s high level of private-sector debt is more of a medium-term issue that will not be resolved in 2019.

There are numerous risks to the view – the main ones centred around our US/Chinese growth, US rates and trade tension outlook – that we will continue to follow closely.

The accumulation of headwinds to EMD in 2018 pushed Hard Currency and Local Currency risk premia to attractive levels. We believe that, given our moderately constructive outlook, Hard Currency and Local Currency valuations offer much better entry points into EMD Hard Currencies and Local Currencies now than they did in late 2017, and technicals are supportive. We expect mid-single-digit returns for both EMD Hard Currencies and Local Currencies on a one-year horizon.

Trade war: The US versus the rest of the world

In recent months, America’s trade policy has called into question the rules-based multilateral system, thereby breeding tension and uncertainty, particularly with China. Florence Pisani, Global Head of Economic Research, provides insights into this trade war and its possible implications for the global economy.

What management factors enable the ‘structural’ decorrelation of a portfolio?

A management strategy can have an impact on several levels of portfolio decorrelation.

Over a short time scale, the goal is to limit dependency on violent movements localised in time. A portfolio that seeks to limit (or end) its nominal net exposure, is particularly effective in this type of environment. Indeed, in these situations, all assets tend to correlate with one another. Thus, protecting one’s portfolio via short positions equivalent, in terms of the nominal net exposure, to long positions, is effective: the movements of the two pockets become similar to the underlying correlation, and the impact on the portfolio remains very limited. A stress test calculation is a good way of checking the dependency of the portfolio created in relation to these violent shocks.

Over a longer time period, the goal is to limit dependency on long-term movements in the underlying market. Simple delta hedging is not sufficient to achieve this objective. Over a longer time period, the differences in sensitivity between equities and their market will become apparent. Measuring beta, i.e. the sensitivity of each equity in relation to its benchmark, makes it possible to determine overall portfolio sensitivity. Thus, when constructing positions, the fund manager must seek to keep beta at a very weak absolute value to limit long-term sensitivity to the variations of the investment universe.

The specificity of the investment approach also contributes to a differentiation of the portfolio in relation to conventional investment models which are very common in the markets. For our part, we merge two approaches that are rarely combined in the industry.

First of all, we use a methodical and quantitative approach to detect investment opportunities:

- In our cash pocket, eligible positions must meet precise constraints in order not to add further risk to the portfolio.

- In our daily management, we rely on quantitative processes and models that enable us to precisely visualise the opportunities we want to pursue.

Second, we use a fundamental approach for the effective implementation of our strategies. We attempt to understand the risks implicit in each position. This enables us to validate the position in the current context and, when required, propose a suitable solution (hedging, nominal, etc.).

By applying these three levels of analysis to our own funds, we can offer investment solutions that are decorrelated from the market environment and its short- and long-term trends –indispensable complements to the conventional approach to your portfolio in this uncertain environment.

What management factors enable the ‘structural’ decorrelation of a portfolio?

What will drive financial markets in 2019?

We have identified two main drivers of market performance in 2019: the evolution of the growth-inflation mix, and geopolitical uncertainty. We expect slowing but still above-potential global output growth and a gradual rise in inflation, leading to moderate monetary tightening. In the light of what happened in 2018, geopolitical uncertainty is likely to shape or shake financial markets in 2019.

In 2019, we expect slower economic growth than in the previous two years, but no abrupt slowdown. In particular, we see the potential for convergence between the United States and the rest of the world, as the stimulus effect from the tax cuts is fading. More specifically, we expect the recent policy-easing measures undertaken by China to bear some fruit and mitigate the negative impacts of the slowdown and the trade war on emerging markets. In Europe, economic momentum, although disappointing and less dynamic, remains above-potential. In this context of ongoing positive growth, we prefer equities over bonds and are maintaining a cautious approach towards credit.

As the economic cycle progresses, labour markets – from the United States to Japan via the United Kingdom and Germany – are becoming increasingly tight. This should put upward pressure on wages. In addition, rising producer prices and the introduction of tariffs should lead to higher inflation rates and further yield-curve flattening. That said, we expect the rise in inflation to remain gradual and do not expect any overshooting into “inflation fear”. Hence, central banks might respond with only moderate monetary tightening. In addition, 2019 will mark both the final year of Mario Draghi’s 8-year term at the helm of the ECB and the end of quantitative easing.

Geopolitical uncertainties represent the main risk which could tip the scales from an expected soft landing towards a hard landing. The several layers of uncertainty could lead to increased market volatility in 2019. First, on a global level, the confrontation between the United States and China certainly reaches beyond trade issues. In 2018, the implementation of tariffs has impacted capital markets negatively as it ultimately impacts corporate earnings and slows down global economies via lower business confidence. Second, the European agenda will remain full of uncertainties, ranging from Brexit and unresolved Italian budget issues to stalling structural reforms in France. The European parliamentary election at the end of May will be an important milestone, as populist and Eurosceptic forces are likely to gain influence. Clearly, Europe faces a tricky year in 2019. The good news is that the sell-off experienced in 2018 has already restored an equity risk premium both in emerging markets and in the Eurozone, as valuations have come down significantly. Durable political relief could therefore translate into an equity market re-rating for those regions.

It’s Saturday, so it must be Quiz Day!

Each Saturday in December, Candriam will be giving five people the chance to taste the local specialties of some of the countries in which Candriam has an office – France, Belgium, the Netherlands and Italy. The competition itself is a piece of cake: reply correctly to the 5 questions of the day and to the tie-breaker question before the following Saturday’s quiz.

And that’s not all! At the end of the month, the person to have correctly and most quickly answered (to deadline) all quiz questions will win the sustainable travel gift par excellence: an electric scooter!


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Monetary policy: the dawn of a new era?

After 10 years of loose monetary policy, 2018 has been a turning point. A new era is dawning and is disrupting financial markets. Following a period of massive expansion, major central bank balance sheets are now stabilising. The recalibration of the European Central Bank’s (ECB) Asset Purchase Programme to EUR 30 billion per month and the reduction in the Federal Reserve’s (Fed) balance sheet mark the start of a withdrawal of liquidity facilities. With the Fed having tightened its base rates by 0.25% for the ninth time in a row from December 2015 onwards, while the ECB is now on the point of suspending its purchase programme, financial conditions have deteriorated and clouds are gathering over the global economy. Winding down quantitative easing is proving to be a perilous exercise.

Skilful communications from the central banks will undoubtedly accompany monetary normalisation. After promising to refrain from raising rates before summer 2019 and to continue investing the interest from its assets for “as long as necessary”, what does Mario Draghi have in store for us before he stands down? He is very likely to express his support for the banking sector, which can survive only in an environment characterised by higher monetary rates and low financing costs. We are therefore inclined to believe that targeted longer-term refinancing operations (TLTRO) will be extended into the first half of the year and there will be an initial hike in the deposit rate during the second half. On the other side of the Atlantic, the Fed under Jerome Powell is likely to adopt a more pragmatic approach based on economic indicators. Two more rate hikes are expected in 2019 notably due to wage tensions triggered by low unemployment. Although the gap between the yield curve in the US and Europe will therefore remain wide, it should nonetheless narrow progressively, initially among longer-term maturities.

The performance returned by fixed-income assets will not remain unscathed by monetary normalisation. On the one hand, there will be less demand for bond securities and on the other, supply will increase. Public deficit funding and the debt maturity wall will increase issue supply while central bank purchase programmes will have been significantly tapered. These factors will lead to higher volatility notably among corporate bonds and will also incur a liquidity risk. Among bank debt, the TLTRO expiry should generate EUR 200 billion financing requirements in secured and senior formats. The announcement of an extension of the TLTRO by the ECB will breathe fresh life into European bank funding, notably in Italy.

Lastly, 2019 will be marked more by a return to fundamentals, rather than heightened volatility. When a monetary tidal wave hits the shore, it sweeps away everything in its path. Unfortunately, it is only once the tide goes out that the damage becomes visible. A more discerning investment approach has therefore made a comeback, providing excellent investment opportunities, while credit spreads have already returned to more attractive levels. Selectivity and flexibility are the keywords of our fixed-income investment strategy which will enable you to arrive safely in port in 2019.

Monetary policy: the dawn of a new era?

China: Should we fear a hard landing?

Over the past few months, signs of a slowdown in the Chinese economy have multiplied, due to the deleveraging campaign led by Beijing and also to the trade war being waged by the US over exports. The Chinese authorities are currently facing a challenging situation, which may have consequences for the rest of the world. Candriam economist Emile Gagna analyses the situation and potential resolutions.

Do the new market conditions spell new alternatives for your portfolios?

The Goldilocks environment of 2017 has given way to a slew of uncertainties that has impacted markets this year. Even if the US economy is going from strength to strength, trade tensions between the United States and China, post-Brexit negotiations in Europe, the rise of populism and tensions in the Middle East have created a degree of instability conducive to the return of risk appetite.

We now have to deal with new market conditions in which risk is making a gradual comeback, volatility is on the rise and certain asset classes are in decline. This renewed market volatility is probably making you seek tips on how to more serenely navigate these troubled waters.

A diversification strategy might be the first thing that comes to mind. This, however, is an approach that – in the past, at times of growing uncertainty – has been faced with recorrelating risk factors.

In other words, as all asset classes could decline simultaneously, it is not enough to construct decorrelated portfolios just by doing the math (calculating the correlation coefficient).

Do the new market conditions spell new alternatives for your portfolios?

Integrating other asset classes such as private equity, real estate and infrastructures, all of which offer potentially attractive returns, was deemed another possible (partial) solution. These assets, with their long-term cashflow visibility, are less sensitive to market fluctuations as they are unlisted and protected against inflation risk. However, interest-rate hikes are impacting their financing cost and many of these strategies have cash that they are unable to invest, due to the shortage of suitable investments. And, of course, if these assets, like all other illiquid assets, can be difficult to obtain, the difficulties increase in the case of a compulsory sell-off.

Smooth navigation depends on finding assets that are, first of all, liquid, and that, secondly, provide markets a real decorrelation opportunity at all times and, thirdly, boost your portfolio performance in the medium term. An analysis of the average performance of absolute return strategies in comparison with economic cycles these past 20 years shows five strategies with a behaviour independent of our current environment of low economic growth and high inflation:

  • Short Bias: net short portfolio on equity markets;
  • Global Macro: long/short arbitrages across multiple asset classes, to capture inefficiencies generated by excessive market behaviours;
  • CTA: portfolio that captures bullish and bearish trends on different markets;
  • The Equity Market Neutral strategy, which combines long and short equity positions with a net neutral exposure;
  • And, finally, Merger Arbitrage, as applied to M&A deals.
Do the new market conditions spell new alternatives for your portfolios?

Combining these liquid strategies in your portfolio will help it withstand market upheavals and help you look forward to the months ahead.

Time of transition for Emerging equities on the back of the Trade War?

It is likely that 2018 and 2019 will come to be seen as transition years for emerging markets. While they entered 2018 positively, continuing a long period of strength, stock prices declined substantially over the year. However, 2019 could mark the start of a new modest upward trend, underpinned by still-positive (relative) earnings growth and a reduced impact of the negative 2018 drivers.

2018: tariffs and interest rates take their toll

A promising start to 2018 faded fast as the US Federal Reserve started to tighten its monetary stance and the US administration’s corporate tax cuts prompted many US companies to repatriate overseas earnings. The result was a shortage of dollars in the global system, which typically has a negative impact on emerging markets.

Then came the announcement by President Trump of trade tariffs, followed by the threat of further tariffs, notably targeting China.

Even aside from the trade war risk, concerns also surfaced about the underlying Chinese economy, which has been growing at a slower pace as the Chinese authorities restrict credit in order to keep the economy from overheating. Meanwhile, infrastructure investments, a major contributor to the economy in the post-financial crisis era, fell off a cliff.

2019: bottom-up investing the way to go

There is reason to believe that the US and China may negotiate an economic ceasefire. President Trump has a record of talking tough and then softening his stance and negotiating. The pact that replaced NAFTA is a case in point. If agreement can be found, emerging market stocks will react positively.

The deal agreed during the G20 in early December is a short term relief of only 3 months. In the meantime if clear signs of economic weakness should occur, Beijing will likely provide significant stimulus.

It has already instituted export rebates, tax cuts for companies and households, lower reserve requirements for banks and new infrastructure projects. Banks have been ordered to lend more to the private sector, which represents 60% of the economy. Beijing could also weaken its currency to make its exports more competitive.

With this year as a guide, 2019 will certainly not be easy, going forward. 2018 was marked by enormous volatility. India, for example, was a standout performer until its financial sector hit the buffers in the third quarter. Shares in Brazil, on the other hand, soared after the election of Jair Bolsonaro in October. Mexico’s stock exchange was steady until the new government halted the building of a new airport and capped fees in the banking sector. Shares in Mexico’s largest bank have fallen 40% since October.

So, with many well-managed companies offering value, the bottom-up approach is the wisest approach to emerging markets. Although markets hammered growth companies in 2018, we think many investors will start to rotate back into those quality growth stocks in 2019.

Low short-term visibility, but a strong longer-term outlook

Visibility in emerging markets is poor and negative surprises are possible – notably further interest rate rises by the Fed and an escalation of the trade war.

On the other hand, after a substantial correction, valuations are attractive and any positive surprise should cause prices to surge. In addition, the potential for growth continues to be higher than for developed markets, where risks appear to be declining.

We recommend you to see 2019 as an opportunity to buy into an oversold market and hold your nerve to take advantage of the strong long-term fundamentals.

The European project: Facing a stalemate?

The European project is currently weakened by the rise of Euro-sceptic parties and by failing economic growth. Member states are more divided than ever and this is hindering stability and sustainability. What lies in store for this common project? Can we count on compromise? Florence Pisani, Global Head of Economic Research at Candriam, gives her take.

It’s Saturday, so it must be Quiz Day!

Each Saturday in December, Candriam will be giving five people the chance to taste the local specialties of some of the countries in which Candriam has an office – France, Belgium, the Netherlands and Italy. The competition itself is a piece of cake: reply correctly to the 5 questions of the day and to the tie-breaker question before the following Saturday’s quiz.

And that’s not all! At the end of the month, the person to have correctly and most quickly answered (to deadline) all quiz questions will win the sustainable travel gift par excellence: an electric scooter!


Get typing!

How well do you know your Candriam?


How can we turn climate change into opportunities

Climate change represents a very urgent and potentially irreversible threat to human societies and our planet, but also, on a short-term scale, to our global economy. At Candriam, we believe that the most realistic and economically viable pathway is a smooth and gradual transition to a net zero-carbon economy, at an accelerated speed. And this transition will offer a lot of opportunities, to create innovative solutions and value, on this newly-oriented economy.

Brexit conclusion approaching

11 December. This, for many Britons and Europeans, will be a red-letter day, the day when the House of Commons has to vote on the ‘Withdrawal Agreement’, or “divorce settlement”, if you will, that Prime Minister Theresa May has negotiated with the European Union. At the time of writing, May is still far from assured of a majority in parliament.

The divorce agreement was just about the only “achievable” compromise to have taken into account the most important demands and deal-breakers of both parties. For the EU, that has meant establishing a level playing field to ensure that lower-standard or lower-tariff goods cannot simply be imported into the EU via the UK. Further, the border between the Republic of Ireland and Northern Ireland is to be left open, this being an essential part of the Good Friday peace agreement of 1998. For the UK, it is important to actually exit the EU and take back control of the borders and those seeking entry into the country. There must also be no hard border between Northern Ireland and the UK.

Technically speaking, the deal provides for the UK remaining for at least two years in the customs union and for Northern Ireland remaining in the single market. This will be the situation until a final trade agreement has been reached between the UK and the EU. In the meantime, the UK may not enter into any trade agreements with third countries and must continue to comply with EU goods-related standards and jurisdiction. The UK shall have no input into the standards. Although no new tariffs will be levied, there will, on the contrary, be additional border controls.

From an economic point of view, by far the best-case scenario for both the UK and the EU involves the UK not exiting the EU. May’s ‘Soft Brexit’ deal is detrimental and will disrupt trading between both parties via extra border controls, which will lead to crossing delays. What’s good about this deal, however, is, again, that no extra tariffs will be applied to trades conducted between the UK and the EU. Consequently, the economic cost of this soft Brexit will remain relatively limited in both regions.

Theresa May might not even get majority support for this deal. Her own coalition has the narrowest of majorities, and her government partner, Northern Ireland’s Protestant DUP, feels that the deal splits their country from the rest of the UK to a greater extent than they would like, and so is likely to vote against it. Even the hard Brexiteers within her own Tory party, such as Boris Johnson, will vote against. They see the deal as one that keeps the UK under the EU umbrella and are pushing for what would nonetheless be an economically disastrous hard Brexit.

A hard Brexit, for both the UK and the EU, is likely to be economically highly detrimental. Increased WTO tariffs of up to 20% will be levied on UK exports and imports. Frequent controls and delays are promised at the borders, with the threat of food and medicines shortages in the UK ... The accumulated growth loss should, for the UK, amount, in the long run, to 8% of GDP.

The PM will, in such a case, have to seek support from the opposition to secure approval of the deal. Jeremy Corbyn’s Labour is the biggest opposition party and he is already on record as saying that he will reject the deal. He is hoping above all for new elections. Many Labour members also hope that rejection will bring in its wake a new referendum overturning Brexit.

We think that the House of Commons will end up approving the Withdrawal Agreement, after perhaps several rounds of talks, as some Labour members will have reached the conclusion that this is the most realistic and responsible choice. However, a rejection is certainly not out of the question. What then happens is far from clear. Although most parliamentarians are against a hard Brexit at all costs, it may be difficult to avoid in the case of a rejection. A new referendum is also a risky alternative with a highly uncertain outcome. Approval of the deal is therefore the least bad option.

Technology: is the game over?

Amid investor despair in the second half of 2018 about the decline of technology stock prices, a little perspective is required. Technology has kept up with global equity market in 2018, despite the stock price retrenchment in the latter part of the year, and the longer term outlook is still largely positive.

2018: a year of two halves

After a decade of almost continuously rising tech prices, including extraordinary gains for the so-called FAANG (Facebook, Apple, Amazon, Netflix and Google) companies, the technology sector suffered an abrupt reversal in the middle of 2018.

Why? Well, with long-term Treasury yields edging above 3%, investors are starting to have an attractive risk-free alternative, and the trade war between the US and China escalating, investors began question earnings assumptions. Around the same time, a number of profit warnings by semi-conductor companies spooked investors and Apple warned its suppliers to cut sales expectations for the latest iPhone. Add to that growing concerns – even if unsupported by market signals- of a future recession, and you have a perfect storm of tech anxiety.

But let’s remember that the correction was about 15%. That is not a crash and is definitely not comparable to the technology-led downturn of 2000.

2019: geopolitics and fundamentals

A reset was inevitable amid unsustainable expectations for tech companies. This reset is actually taking place: tech earnings are predicted to rise by a more modest high single digit number in 2019, which is more or less in line with broad markets.

Perhaps the most important driver in 2019 will be the trade war. Tariffs directly impact revenues, but there are indirect effects too, with many Chinese companies postponing capex investments. This will hit profits at both US and Chinese firms.

A longer-term impact is that China is being forced to develop its own semi-conductor industry, with companies such as Tencent already starting to develop chips for AI. As China catches up with the US, this could impact earnings of US semi-conductor companies in the mid-to-long term.

In short, any truce between US and China would definitely be positive for tech stocks.

Another important driver is economic growth. In the case of recession and deceleration of IT earnings growth, tech stocks will be among the first to suffer as investors switch to defensive assets. However, our baseline is that 2019 will not be a year of recession.

The third main driver – which is also the long-term driver of technology growth - is the market rollout of innovative technology.

Which technologies will bear most fruit?

We anticipate a step forward in the internet of things, while 5G (the fifth generation of cellular mobile communication, that targets lower energy consumption, reduced latency, massive device connectivity and a higher data rate), should also start to be rolled out in 2019. Currently, 5G is in test phase by a few operators, but this will evolve as the technology is more widely rolled out.

We are also carefully watching the evolution of autonomous driving and of electric vehicles. The growth of electric and autonomous vehicles will be accompanied by parallel growth in the semi-conductors on which they depend.

We feel slightly less comfortable about social media, which has not adequately responded to criticism over privacy and manipulation. Even if, potentially, there is significant upside in many of these names after the correction, growth in social media could be hampered by future regulation and litigation.

FAANGs cease to be key drivers of value

We should note that business models of the FAANGs are starting to mature and we see deceleration in their top line growth. Until now Alphabet (Google) has grown at 20% a year and Facebook at an incredible 45% a year. But in a clear sign of decelerating growth, Facebook is predicted to expand by 35% in 2018 and by 25% in 2019.

While the FAANGs will still be important in 2019, we no longer view them as key drivers of the industry’s evolution.

As a final word, we remain convinced that IT remains an attractive investment opportunity, as the industry will continue to be driven by the accelerating roll-out of world-changing new applications such as Internet of Things, advanced robotics, 5G and OLED. As an investor, you should monitor closely the evolution of the tariff war, global economic growth and the regulation of social media, factors that will probably have the biggest short-term impact on the sector.

Should we fear a continuation of the bear run in 2019?

We have a strong tendency to prolong end-of-year markets trends into the following year. After the severe correction of October 2018, November’s mitigated market rebound and December’s important steps to make (UK parliamentary vote on Brexit, FOMC, European finance ministers’ response to the Italian budget, …), investor sentiment is very cautious, in sharp contrast to last year’s more optimistic outlook.

Should we expect a market downturn next year? We have reasons to be more cautious: the economic context is likely to be less favourable, central banks in developed countries will continue to tighten, and fiscal and monetary margins of maneuver – should a crisis emerge – are limited. Markets are twitchy. Volatility is spreading through all risky assets, and with faster and stronger spikes. Investors’ conviction levels appear low, fluctuating from worst-case scenario to a more optimistic outlook in the space of a few days.

So which way will the scale tip? Equity market valuations have already priced in an economic slowdown and higher risk premia. The likelihood of a recession in the foreseeable and short-term future is low. In this context, corporate profits should continue to show positive growth. Central banks will show their pragmatic side and adapt the pace of their tightening to the economic conditions. As a result, our baseline scenario continues to foresee a moderate equity market rise next year. The risks, as every year, are manifold and could affect both confidence and growth. That’s what happened in 2018. 2019 may turn out differently.

Big Shifts Ahead: Our convictions, Your resolutions

Candriam launches its countdown to 2019 with Renato Guerriero, Global Head of Distribution. The principle is quite simple: every day until the New Year, we will open a new box of the calendar and answer a new question regarding the opportunities of 2019.