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1875 MAP
MARKET ALLOCATION PROCESS
Investment Strategy
August 2016
CONTENTS
Investment policy
Economic environment
3
Financial environment
7
Investment strategy
1875 FINANCE ·40, rue du 31 Décembre · Case Postale 6208 · CH-1211 Genève 6 · Tél. +41 (0)22 595 18 75 · Fax + 41 (0)22 595 18 00 · www.1875.ch
1875 FINANCE (Luxembourg) · Bv. Prince Henri 41 · L-1724 Luxembourg · Tél. +(352) 27 99 1875 · Fax + (352) 27 99 1875-75 · www.1875.lu
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2
INVESTMENT POLICY
Economic Environment:
Despite uncertainties surrounding BREXIT, the financial conditions have
improved overall and the world economy has continued to recover
during the month of July.
Production growth went beyond expectations in emerging countries
due to the recovery in investment in China and exports of commodities in
Brazil and Russia. It met expectations in developed countries. Indeed,
the slowdown seen in the United States during the first quarter was offset
by the stronger position of Euro Zone economies.
Investment in Chinese fixed assets
The improved economic outlook in the first half of the year was mainly due
to the fall in production costs in advanced nations and to the fiscal
and monetary stimulus measures implemented in China. Given the
ongoing surplus of productive resources, deflationary pressures have
remained high. Nominal growth will continue to be on a moderate
scale in the second half of the year, given the weak productivity gains
and still excessive level of debt.
US productivity
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INVESTMENT POLICY
•
USA: Up just 1.2% in the second quarter, GDP growth was weaker
than expected. This limited growth may be explained by the
weakness of investment, but also the decline in stocks and
deteriorating external trade balance. Thanks to the increase in
consumption (4.2%), final sales nevertheless grew by 2.1%, compared
to 1.2% in the previous period. In terms of our leading indicators, US
growth will remain subdued in the second half, as fixed asset
expenditures continue to be penalised by the decline in corporate
profits.
•
Euro Zone: Considering the development of our economic indices,
economic expansion in the Euro Zone will continue to recover;
so far, the uncertainties surrounding BREXIT have only had a limited
influence on consumer and business sentiment. With regard to the
rise in inflation expectations flagged by our model, price indices
appear to have reached a floor level and will progress gradually
over the next few quarters.
Source: 1875 MAP
4
INVESTMENT POLICY
•
United Kingdom: In line with our expectations, surveys among
Purchasing Managers (UK Manufacturing PMI registered 48.2 in July)
predict that industrial activity will contract in Great Britain in the
third quarter. As Britain's access to the European Union is set to
become more limited, services will not be spared from the
expected decline in their demand, contributing to the slowdown
of British growth. As a result of the sharp fall in the British pound,
leading inflation indicators have recovered, which would favour a
recovery of price indices during the second half of the year.
•
Switzerland: Economic data released during the month of July point
to very subdued growth in Switzerland. The recovery of our
inflation indicators do, however, anticipate a gradual decrease in
deflationary pressures.
Source: 1875 MAP
5
INVESTMENT POLICY
•
Japan: Despite the new fiscal stimulus programme worth 4.6 trillion yen
announced by the Japanese government, the slowdown forecast for
the Japanese economy is set to continue and the risk of deflation
will persist during the second half of the year.
•
Emerging countries: Following the recovery of commodity prices and
support measures taken by China, the contraction of the economic
cycle in the emerging area has lessened over the last 6 months. Due
to the ongoing excess production capacity and lack of sufficient structural
reforms, the recovery of the economy in developing nations will remain
uncertain and especially modest by historic standards.
•
China: Having benefited from the increased government investments and
monetary easing implemented by the People's Bank of China, the
expansion of the Chinese economy is set to lose momentum given
the lack of new fiscal and monetary stimuli. The risk of seeing a significant
decline in growth is, however, mitigated by the ongoing low interest rates
and weakening of the Renminbi.
Source: 1875 MAP
6
INVESTMENT POLICY
Financial Environment:
•
Contrary to various expectations, the financial environment has not
deteriorated following the BREXIT result. Rather, it improved in
July due to the combined decline of bond yields and risk premiums.
Given the lack of major monetary stimuli and the ongoing systemic
risk, which is at an historic high, further easing of financing
conditions does, however, now appear limited.
•
In line with our expectations, US monetary authorities have not
changed the direction of their monetary policy. Due to the gradual
recovery of inflation induced by salary rises, an increase in rates by the
US Federal Reserve still seems likely during the 4th quarter, which
suggests that investors' expectations remain overly accommodating.
Source: 1875 MAP
7
INVESTMENT POLICY
•
While the ECB continues to deploy its asset purchasing programme,
expanding its interventions to corporate bonds, and continues its
refinancing operations, the European Banking Authority (EBA)
announced the stress test results carried out on the 51 largest banks in
Europe, covering 70% of banking assets held within the European Union.
•
In its report, the EBA found that the CET1 (Tier 1) average capital ratio
was up by 200 basis points from 2014, amounting to 13.2%. It believes
that this increase of 180 billion in equity demonstrates the added
resilience of European banks. It also notes, however, that the individual
results vary greatly depending on each bank and, therefore, that
supervision of certain institutions must be increased, with further
recapitalisation where appropriate. Yet the lack of integration of
sovereign risks and the uncertainties tied to the repayment of
doubtful debts do, however, make the stress test less relevant and
unable to negate the fragmentation and fragility of the European
banking system.
Source: 1875 MAP
8
INVESTMENT POLICY
•
While investors were expecting aggressive monetary easing, the
Bank of the Japan made only minor policy changes in its last
meeting. In fact, it only raised its ETF purchasing programme by 2.7
trillion yen and increased its lending facilities in USD.
•
Considering the weak nominal growth tied to the moderate external
demand and deterioration of the terms of trade, the Australian
Central Bank decided to lower its benchmark rate by 25 basis points
to 1.50% in late July.
•
While remaining restrictive, given the small expansion of long-term
monetary aggregates and the lowering demand for credit, financial
conditions in emerging economies have improved over the last
three months thanks to the reduced risk premiums.
Source: 1875 MAP
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INVESTMENT POLICY
Investment Strategy: Asset Classes
•
Further reduce exposure on short-term investments.
•
Decrease the weighting on bonds which will then be
underexposed with a reduced duration.
•
Maintain the underweight on equities.
•
Reduce the exposure to indirect international real estate,
which will then be more significantly under-invested following
the deterioration of monetary conditions and valuation levels.
•
Increase exposure to gold on price weakness, which will
then be overweight given the decreased actual profitability of
financial assets and increased risk premiums.
Source: 1875 MAP Wealth Management CHF
10
INVESTMENT POLICY
Investment Strategy: Bonds
•
Further decrease the exposure on bonds to moderately
underweight them and reduce the portfolio durations to have
an interest rate sensitivity that is lower than the strategic
allocation. Given their highly excessive valuation, the
government bond markets will be gradually affected by the rise of
inflation expectations.
•
Keep an overweight position on borrowings in AUD and – to a
lesser extent – in CAD. Continue to underweight allocations in
USD, GBP, CHF, JPY and now in NOK.
•
In terms of debtor categories, reduce the underexposure to US
private bonds following the lesser deterioration of earnings
prospects at the expense of their government counterparts, and
keep a targeted overweight position on European companies'
borrowings.
Source: 1875 MAP
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INVESTMENT POLICY
Investment Strategy: Equities
•
After their strong recovery during the month of July, equities
have once again been put under strain by a more expensive
valuation and must therefore remain underweighted.
•
The risk of depreciation of the stock markets is, however,
contained by the following factors:
•
•
More contained deterioration in profit forecasts.
•
Ongoing selective rise in multiples promoted by the
moderate expansion of monetary conditions.
In terms of geographical allocation, the correlation between the
major stock exchanges will remain important in the short term
due to the ongoing large risk premiums, thereby limiting the
effects of diversification.
Source: 1875 MAP
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INVESTMENT POLICY
Investment Strategy: Equities
•
Nevertheless, markets benefiting from an expansive
monetary environment may still enjoy more favourable
circumstances:
 This will entail giving preference to British
securities and – to a lesser extent – Swiss, Euro
Zone and Australian stocks.
 Given the more expansive valuation for the former, and
the significant contraction of earnings for the latter, US
and emerging equities must remain underexposed
compared to international standards.
Source: 1875 MAP
 The worsening financial conditions in Japan and
Canada mean that their market must be kept
significantly underweight.
13
INVESTMENT POLICY
Investment Strategy: Currencies
•
EUR/USD: Increase the exposure of the EUR, which will then
be slightly overweighted following the US Federal Reserve's
rate hike report.
•
EUR/CHF: Increase the weighting of the EUR against the CHF
to moderately overexpose the European currency given its
reduced risk premium and undervaluation against the CHF.
•
GBP/EUR : Keep the underweight of the GBP against the EUR
given the ongoing high external premium on the British currency.
•
USD/JPY: Reduce the strong underexposure to the USD
against the JPY given the lower risk premiums and narrowing
monetary conditions.
•
AUD/USD: Continue to significantly underweight the AUD
given the ongoing deterioration of the terms of trade.
•
USD/CAD: Reduce the underweight of the CAD to neutral as a
result of its reduced risk premium and stronger undervaluation.
Source: 1875 MAP
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Important Legal Information
This publication is intended for information purposes only, and should not be construed as an offer, recommendation or solicitation for sale, purchase or engagement in any other transaction.
Furthermore, by offering information, products or services via this publication, no solicitation is made to any person to use such information, products or services in jurisdictions where the provision of
such information, products or services is prohibited by law or regulation. All material is provided without express or implied warranties or representations of any kind and no liability for any direct or
indirect damages arising out of the use of this information is accepted.
All information contained in this publication has been prepared by 1875 FINANCE SA on the basis of publicly available information, internally developed data and other sources believed to be reliable.
It is for general informational purposes only and should not be construed as an individualised recommendation or personalised investment, tax or legal advice. The information is subject to change
without notice. Reasonable care has been taken to ensure that the materials are accurate and that the opinions stated are fair and reasonable. All opinions and estimates constitute our judgment as
of the date of publication and do not constitute general or specific investment advice.
Investments in the asset classes mentioned herein may not be suitable for all recipients. Past performance is no guarantee or indication for future results. The price, value of, and income from
investments in any asset class mentioned in this publication may experience upward and downward movement and investors may not get back the amount invested. International investing includes
risks related to political and economic uncertainties in foreign countries, as well as currency risk. Any investment should be made only after thoroughly reading the current prospectus and/or other
documentation/information available. Nothing contained in this document constitutes legal, tax or other advice, nor should any investment or any other decisions be made solely based on this
document.
This publication is not intended for distribution to, or use by, any person or entity in any country or jurisdiction where such distribution or use would be contrary to applicable local laws or regulations
or would subject 1875 FINANCE SA to any registration requirement within such country or jurisdiction. Persons or entities in respect of whom such prohibitions apply must not use this publication.
This document is not intended for distribution in the U.S. or to U.S. persons.
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