Syz & co Syz asset management - market outlook 8 february 2013

8 February 2013

The main points at a glance
• “A gradual upturn in global growth during 2013”. This is the title of the
Bonds
January update of the International Monetary Fund’s growth forecasts.
Equities In this title the word “gradual” is just as important as the word “upturn”,
as is borne out by the outlook for global growth in 2013 and 2014, at
Hedge funds
+3.5% and 4.1% respectively, following +3.2% in 2012.
Projections at 6 months • Yet at the end of 2012 and beginning of 2013 the prevailing feeling was
above all one of relief over the “upturn”: the dissipation of the risk that
the euro zone might break up, stabilization of growth in China and the
appearance of a domestic dynamic in the United States have significantly
reduced the risks of a disaster scenario for 2013.
• But, after the wave of euphoria, the reality of an upturn that is only
“gradual” has to be taken into account. While US growth does indeed
appear to be sounder today than it was one year ago, it will have
difficulty in accelerating well above its average rate in recent years
(2%), owing to the (in the end gradual) tightening of budgetary policy.
In Europe, while the situation appears to be improving (very gradually),
it depends on foreign demand and is being threatened by the
appreciation of the euro. In Japan, the beneficial effects on activity of
the yen’s depreciation will probably only be very gradual and, in the
emerging countries, it also seems difficult to expect a recovery of growth
that would be more than gradual…
• Yet the rise in share prices on equity markets at the beginning of 2013
has been anything but gradual: +5% in one month for the MSCI World is
a pace that cannot be extrapolated and that calls for a break or even a
correction. Before the upward trend probably returns, thanks to
economic fundamentals that are indeed improving… gradually!

Economy
United States ........................................................................... 2
Growth is now driven by domestic demand
Europe ..................................................................................... 3
The euro’s appreciation threatens the recent “upturn” in economic
activity
Japan....................................................................................... 4
The Bank of Japan eases its monetary policy
Emerging economies................................................................ 4
The rebound of growth in China is export-led
This document is based on information
collected until the Monday preceding
publication.
Markets
Equities ................................................................................... 5
A salutary break
A publication of the Research & Analysis
team Bonds ...................................................................................... 5
SYZ Asset Management A correction on the bond market
Tel. +41 (0)22 819 09 09 Exchange rates ........................................................................ 6
info@syzbank.ch
The euro continues to rise and the yen to fall
Authors:
Yasmina Barin
Asset allocation
Adrien Pichoud Allocation grid ......................................................................... 7
Fabrizio Quirighetti Part of the cash has been invested in alternative investments

This document has been produced purely for the purpose of information and does not therefore constitute an offer or a recommendation to invest or to
purchase or sell shares, nor is it a contractual document. The opinions expressed reflect our judgement on the date on which it was written and are
therefore liable to be altered at any time without notice. We refuse to accept any liability in the event of any direct or indirect losses, caused by using
the information supplied in this document.

8 February 2013

Economy

United States 4th quarter, confirming the ongoing transition from
recovery - driven by investment and exports - to
The stream of favourable economic statistics has slowed
expansion based on domestic consumption. Household
down somewhat since the middle of January, acting as a
expenditures have accelerated in comparison with the
reminder. Indeed, despite the encouraging signs that
spring and summer, probably supported by the drop in
appeared in 2012, US growth is likely to remain below its
the jobless rate. The recovery in the residential
trend in 2013. It is a signal that, although the growth
construction sector is being confirmed quarter after
dynamic remains positive and the risk of recession has
quarter and in 2012 the sector again became a positive
been ruled out with the last-ditch agreement on fiscal
contributor to growth for the first time since the credit
policy reached at the end of the year, it is nevertheless
bubble burst. And even corporate expenditures on
difficult to see a clear-cut improvement in this growth in
capital goods - which were down during the summer -
the immediate future. A still-high unemployment rate,
have rebounded. The cumulative contribution of
even though it is falling and the (moderate but very real)
consumption and private investment excluding
tightening of budgetary policy are still limiting the
inventories thus amounted to +2.7% in the 4th quarter.
potential for acceleration.
Domestic demand is thus again in the process of
This has translated into a cocktail of economic data
becoming the main engine of US expansion, which
consisting of pleasant surprises and disappointments.
makes the growth dynamic more robust and appears to
The first estimate of GDP in the 4th quarter of 2012 is
be initiating a virtuous circle fuelled by falling
emblematic of this: it appears to be very disappointing,
unemployment and the recovery of real estate. Latterly,
with the first drop in GDP since spring 2009 (-0.1%), but
the return of rising real-estate prices has been added to
was finally rather reassuring in view of the trend in the
the recovery observed in construction over the last 18
different sectors of the economy. In fact, it is the
months. To such an extent that it has triggered a (still
consequence both of a sharp cutback in public spending
moderate) recovery of applications for loans to finance a
on defence, a significant inventory reduction trend
purchase. Households are no longer merely taking
among companies and a deepening of the trade deficit:
advantage of historically favourable terms to refinance
the drop in exports has been more marked than that in
their mortgage at a lower rate, they appear to be
imports. Hence the need to gradually reduce the public
beginning to consider that it is time to take advantage of
deficit has been leading for more than two years to a
a very attractive price/financing rate mix before prices
drop in government spending while the contribution from
and – one day or another - interest rates rise again…
exports is also tending to decrease (cf. chart below).
“Employment” composite index of the ISM manfufacturing
Year-on-year change in the different components of GDP and services indices and change in the jobless rate over 6 months
(inverted)
15

60 -1.50

10

-1.00

5 55

-0.50
0

50 0
-5

0.50
-10 45

1.00

-15

40 1.50
-20

2.00
-25
35

2.50

-30
2005 2006 2007 2008 2009 2010 2011 2012
PRI VAT E CO NSUMPT I O N YoY EXPO RT S YoY 30 3.00
BUSINESS INVEST MENT YoY G O VERNMENT SPENDING YoY 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12
RESIDENT I AL I NVEST MENT YoY Source: T homson Reuters Dat astream I SM EMPLO YMENT CO MPO SIT E

The US economy is indeed changing from growth driven by
US UNEMPLO YMENT RAT E 6M CHNG (INVERT ED)(R.H.SCALE)
Source: T homson Reuters Datastream

exports and investment to a model based on consumption and The indices showing the trend in employment in services and
construction. As for the disengagement of the public sector, it industry rose in January and suggest an upcoming continued
has already begun… decrease in unemployment.

But these unfavourable factors have concealed an As for the labour market, the bundle of indicators
element that is both reassuring and encouraging: private continues to point in the direction of an improvement,
final domestic demand remained well-oriented during the


8 February 2013

even though the monthly employment report cited a supported their exports and turned foreign trade into a
slight increase in the jobless rate from 7.8% to 7.9% positive contributor to their GDP. Spain is currently
and an unspectacular number of jobs created in January posting its lowest trade deficit in more than a decade
(157,000). But the upward revisions of the number of and the rate of decrease accelerated in 2012, not only
jobs created during the previous months, the drop in due to a drop in imports but also thanks to the increase
new weekly jobless claims or the increase in the in exports. As for Italy, it is recording its first trade
“employment” components in the ISM surveys (in both surpluses since 2004 and, while the drop in imports has
services and industry) suggest that the trend is likely to undeniably played a role, the 20%-plus increase in
remain positive in 2013. It should make it possible to exports to “non-European” countries has also been a
absorb the negative impact of the fiscal policy tightening major driving force. Italy’s exports to the EU countries,
and to maintain the increase in consumption. for their part, stagnated over the period…
This role of exports and the improvement in trade
Europe
balances probably explains why the French activity
The improvement in the European activity indicators indices have not shared in this encouraging trend: the
observed since mid-2012 continued into the first month trade deficit has continued to deepen and today it is
of 2013. It is a relative improvement, since the absolute larger than it was in 2008! The moderate reduction
level of these indices continues to reflect a Euro zone in observed in 2012 is, moreover, due to the fact that
recession. But the prospect of a return to growth in the growth of imports has slowed down and not to an
second half of 2013, which has been mentioned by the improvement on the exports front. The lack of
ECB, is gradually becoming more likely. competitiveness of French industry at the international
level is depriving it of the positive spin-offs of a firming
The most spectacular movement comes from Germany, up of global demand, from which Italy, Spain, Ireland
where the PMI activity index in industry returned almost and even more so Germany are managing to benefit.
to the equilibrium level of 50 in January, suggesting the And although the French trade deficit is set to be
end of nearly one year of contraction for the sector. As reduced in 2013, it will be owing to a contraction in
for the services sector, it has recorded a significant imports resulting from the tightening of its budgetary
improvement over the last two months and in January policy and the resultant recession. The weakness of the
returned to its strongest growth rate since mid-2011. French activity indices, which are clearly in the
Similarly, the sharp rebound of German company heads’ contraction zone in both services and industry at the
business expectations is another illustration of the fact beginning of this year, is a reflection of this situation.
that the Euro zone's largest economy, after marking time
at the end of last year, should return to growth in 2013 Trade balance of the Euro zone and euro/dollar
and once again act as the engine of Europe's growth. 000'S
100 1.60

PMI manufacturing index in the euro zone
80
1.50
65

60
1.40

40
60
1.30

20

1.20

55 0

1.10

-20

50 1.00
-40

0.90
-60

45
-80 0.80
99 00 01 02 03 04 05 06 07 08 09 10 11 12
EURO AREA - T RADE BALANCE (SUM 12M)
EUR/ USD(R.H. SCALE)
40
2010 2011 2012 2013 The recent appreciation of the euro is threatening one of the
G erm any France Italy Spain
few engines of European growth at the moment - exports.
So urce: B lo o m berg

Since last summer, the trend has been reversed in Europe. These considerations on the scale of exports to outside
of Europe - both for Germany and for the peripheral
In Italy and Spain, the industrial activity indices are still European countries - lend particular importance to the
in the contraction zone but they too have been upwardly trend in the exchange rate of the euro. For these
oriented since the summer. This improvement probably economies still stifled by budgetary austerity at the
results from the ability of these two economies to take domestic level, an overly strong and/or overly fast
advantage of the firming up of global growth, which has appreciation of the euro might well nip in the bud the


8 February 2013

only glimmer of hope that the improvement in foreign Emerging economies
trade represents. And eyes are turning again towards the
The firming up of the Chinese economy during the
ECB and Mario Draghi, whose positive speech at the
autumn has been confirmed by the publication of GDP,
beginning of January had speeded up the appreciation of
the annual rate of increase of which has rebounded to
the euro. A few words from “Super Mario” to ease the
+7.9% after seven consecutive quarters of slowdown
pressures on the euro would probably be welcome…
and a low at +7.4%. The other activity indicators such
as industrial production and retail sales also rebounded,
The British economy would probably also be in great
returning to an annual increase of above 10% and 15%
need of a providential man and hopes that Mark Carney,
respectively.
the future Governor of the Bank of England, will be that
person. His statements about the possibilities that still China : GDP and exports (year-on-year change)
exist of easing monetary policy can give reason to hope
for even more “aggressive” actions on the part of the 15 100

central bank during the second half of the year. In the
14
meantime, the United Kingdom sustained a relapse 80

during the 4th quarter of 2012 following the summer 13

interlude provided by the Olympic Games: GDP fell by
0.3%, which was the 4th decrease in five quarters. Since
60
12

mid-2010 and the implementation of the fiscal
consolidation plan, the British economy has stagnated, 11
40

alternating between periods of brief rebound and 10
recession. It will take a “Super Mark” at the head of the 20

BoE to restore hope on the other side of the English 9

Channel...
8 0

If there is one central bank that is rejoicing - probably
unreservedly - about the fact that the euro is picking up,
7
-20

it is almost certainly the Swiss National Bank, which is 6 -30
seeing the euro/Swiss franc exchange rate gradually 00 01 02
CHI NA - G DP (YoY %)
03 04 05 06 07 08 09 10 11 12

move away from the 1.20 floor rate put in place in CHI NA - EXPO RT S (YoY % 3M MAV)(R.H.SCALE)

September 2011. Furthermore, the Swiss Confederation
Source: T homson Reuters Datast ream

The Chinese economy’s dependence on exports is still very
is benefiting from the firming up of global demand
great: the rebound of 4th-quarter growth is the consequence of
observed in the second half of last year: Swiss exports a rebound of exports.
are at their highest level since spring 2011 and the
activity index in industry returned to the growth zone in However, this rebound still illustrates the very great
January, its highest level since July 2011. dependence of the Chinese economy on its exporting
sectors and the distance it still has to go to be
Japan rebalanced towards domestic demand. The rebound
The Japanese economy remains “relatively weak” results largely from a resumption of the increase in
according to the Bank of Japan’s own words. Exports exports, accompanied by recourse to liquidity injections.
continue to contract and the trade deficit is reaching Thus while the stabilization of China’s growth is
record new levels. And the rebound of the manufacturing reassuring in the short term, it does not allow one to rule
activity index in January still leaves it at a level out a potential further onset of weakness in the more or
synonymous with a clear-cut contraction. But the hope less near future.
of a radical change of economic policy is fuelling a
certain form of optimism about the outlook for the
Archipelago. A government stimulus plan aims to revive
domestic demand. As for monetary policy, the Bank of
Japan has announced measures which, although they are
perhaps not as radical as had been hoped, are still
elements that testify to a greater determination to get
the economy out of deflation: the inflation target has
been raised to 2% and a substantial liquidity injection
plan has been announced for 2014…


8 February 2013

Markets

Equities enabled defensive growth shares to outperform at the
end of the month, also driven by good quarterly results.
A dazzling performance for the stock markets: since
last November they have constantly attained new The next few weeks will continue to be dominated by
highs. We will have had to wait until the end of January company news, as the earnings season is not yet over.
to notice the first profit-taking moves, at a time when Political news will probably also be determining as the
political news is returning to the foreground with the Italian elections draw near. We remain positive about
upcoming elections in Italy, and Mr. Berlusconi acting the stock markets’ potential to appreciate, as despite
as the killjoy. The economic news has tended to bring the recent bull market they remain inexpensive
confirmation of the trends observed at the end of last compared with bonds. In the very short term, the
year. That is, an improvement of the labour market in return of fears about Europe (tensions in southern
the United States, a slight re-acceleration in Asia and a Europe) might contribute to an increase in market
stabilization of activity in Europe. The addresses given volatility, but we are among those who consider that a
by the main central bankers have remained at the correction would be salutary. The latter would indeed
centre of attention, while the operators fear that the offer investors who have been too conservative in
single currency may grow too strong and help to drag recent months an opportunity to reposition themselves
down the first buds of recovery observed since recently in this asset class which, according to our central
in the euro zone. Finally, the corporate earnings season scenario, should gain from 10% to 15% this year.
has at this stage proved rather reassuring, with a
majority of companies publishing results in line with or Bonds
slightly above expectations. Company heads appear to
Following a 2012 marked by an almost uninterrupted
be expecting 2013 to be better-oriented than last year.
increase in all the compartments of the bond market,
Trend in the main stock markets since November 1, 2012 the first weeks of 2013 have helped to remind us that
bonds can also record negative monthly performances…
This is because the interest rates of safe-haven issuers
have risen, with the 10-year US bond returning to
above 1.9%, its German counterpart to around 1.6%
and the British 10-year bond to about 2.2%.

Performance of different segments of the bond market since
October 2012

107

106

105

104

103

102

After rising uninterruptedly since early November, the markets 101

appear to be marking time against a backdrop of the
increasing political risk in Europe. 100

Rotations were significant over the period. From the 99

end of December to mid-January, the risk appetite
O CT NO V DEC JAN
CG BI W O RLD G O VERNMENT BO NDS BofA ML G LO BAL HI G H YIELD

predominated. This resulted in an excellent stock
BofA EMU G O VERNMENT JPM EMBI G LO BAL CO MPO SI T E
BofA EMU CO RPO RAT E Source: T homson Reuters Datastream

market performance for financial and cyclical stocks. The beginning of 2013 has been marked by a negative
Among the European shares, the operators with a taste performance of most of the compartments of the bond market.
for high-beta stocks looked for shares of lower quality
and also trained their sights on the stock markets of While Italian and Spanish interest rates, for their part,
the European peripheral countries, in particular Italy have remained fairly stable over the period, corporate
and Spain. In a second stage, the return of political bonds have also been under pressure, with non-
fears prompted them to be more cautious, which financial corporate bonds being in the front line. The
latter had acted as a safe haven in 2012 and therefore


8 February 2013

moved in parallel with the government-bond safe
havens. Emerging debt has not been spared, while High
Yield was initially buoyed by the revival of the risk
appetite, before also doing an about-turn.

Exchange rates
The euro’s appreciation trend initiated by Mario
Draghi’s statements in early January has extended into
the beginning of February, pushing the European
currency up from 1.31 to 1.36 against the dollar in the
space of a few weeks. After having moved at around
1.24 against the Swiss franc, the euro fell back at the
beginning of February to 1.23. The Swiss currency has
also strengthened against the dollar, to reach its
highest level since last April against the greenback.
As for the yen - which is still being influenced by the
expectations of a sharp monetary policy easing - it has
further lost ground, against both the dollar and the
euro. The scale of the depreciation of the Japanese
currency against these two currencies now amounts to
nearly 20% since the beginning of the autumn.

Yen against dollar and euro since 2000
70 90

100
80

110
90

120

100

130

110

140

120
150

130
160

140 170
00 01 02 03 04 05 06 07 08 09 10 11 12
YEN vs USD (USD/ JPY, INVERT ED)
YEN vs EUR (EUR/ JPY, INVERT ED)(R. H.SCALE)

Since the beginning of October, the yen has lost 18% against
the US dollar and 20% against the euro.


8 February 2013

Asset allocation
Given the factors described above, we have decided to invest part of the cash held in the “low”, “moderate” and
“medium” risk profiles in alternative investments. For a “medium” risk profile, the proportion of alternative
investments has thus been increased by +2% to 16%, while cash has been reduced by -2% to 8%.

The allocation grid for a “medium” risk profile in euros, as at 4 February, is given below.

Allocation grid for a “medium” risk profile in euros
Bonds 32%
Short-term bonds 25%
Long-term bonds 7%

Equities 40%
Europe 17%
United States 15%
Japan 2%
Emerging countries 6%

Alternative investments 16%
Gold 4%
Cash 8%

Total 100%

“LOW” RISK PROFILE
The weight of alternative investments has been increased by +4% to 18%, at the expense of the weighting of cash,
which has fallen by -4% to 11%.

“MODERATE” RISK PROFILE
Liquidity has been reduced by -4% to 11%, in order to finance the +4% increase in the weighting of alternative
investments, which now account for 20% of the portfolio.

“HIGH” RISK PROFILE
No change. Liquidity still accounts for 2% of the portfolio and alternative investments for 16%.


Syz & co Syz asset management - market outlook 8 february 2013

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Syz & co Syz asset management - market outlook 8 february 2013