2010 Fixed Income Outlook
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2010 Fixed Income Outlook

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2010 Interest Rate Outlook

2010 Interest Rate Outlook

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2010 Fixed Income Outlook 2010 Fixed Income Outlook Presentation Transcript

  • Money does not perform. People do. Press conference: Fixed Income Markets – Outlook 2010 Nicolas Forest, Head of Interest Rate Strategy Koen Van de Maele, CFA, Global Head of Fixed Income 12 January 2010 - Brussels
  • Agenda
    • Interest Rate Outlook
    • Currency Outlook
    • Credit Outlook
    • Synoptic Table
  • What are the legacies of the crisis ? Illiquidity The end of the global recession… Systemic Risk Housing Crisis Global Recession Return of Liquidity Market Normaliza-tion Rebound of Housing Prices Global Recovery Explosion of Government Debt Source : Bloomberg – IMF – European Commission – Dexia Asset Management Euro Zone US Zone End of 2009 End of 2008 End of 2009 End of 2008 Market Data 5957.00 4900.00 1115.00 898.00 Equity Market 0.71% 2.83% 0.25% 1.43% 3 Months Libor Rate 3.38% 2.94% 3.83% 2.07% 10Y Government Yield 20.16 38.00 21.68 38.87 Implied Volatility -6.35% -2.00% -10.00% -4.70% Budget Deficit End of 2009 End of 2008 End of 2009 End of 2008 Economic Data Euro Zone US Zone 8.00% 1.60% 33.90 9.80% 10.00% 6.80% Unemployment Rate 0.50% 1.80% 0.10% Inflation 51.60 53.60 32.90 Manufacturing PMI
  • What are the legacies of the crisis ? … and the explosion of government debt x 2.25 in 10 years 120% (2014) 40% (2014) Source : Bloomberg – IMF – European Commission – Dexia Asset Management
  • In 2010, the exit timing will be crucial Inflation Risk Inflation risk will increase due to the accommodative monetary policy. But sovereign debt remains credible. Buy inflation linked bonds Exiting too late will increase the inflation & sovereign risks Too Late (Q1 2011) Too Early (Q1 2010) Monetary Budgetary Tightening Too Early (Q1 2010) Too Late (Q1 2011) Double Dip (no sovereign & inflation risk) The tightening will derail the recovery. A double dip scenario could support government debt. Buy core countries Sovereign & Inflation Risks The explosion of deficits is strongly bearish and the inflation risk could support the steepening of the curve Sovereign Risk The restrictive monetary policy could reinforce the sovereign risk with risk of downgrades Sell government bonds Source : Bloomberg – IMF – European Commission – Dexia Asset Management
  • The Federal Reserve could be too late… A schedule for the Fed Q4 2009 : End Treasury Buying February 1 : End Lending Facilities June 30 : End Credit Easing H2 2010 Draining Reserves ? 2010 2009 Source : Bloomberg – IMF – European Commission – Dexia Asset Management
  • The Federal Reserve could be too late… A schedule for the Fed Source : Bloomberg – IMF – European Commission – Dexia Asset Management
  • … but the ECB too early A schedule for the ECB December 16 Last 1y LTRO EONIA = 0.35% March 31 Last 6m LTRO EONIA = 0.35% April 13 End Full Alloc. EONIA = 0.50% July 1 € 442 bln mature EONIA = 1.00% September 30 € 75 bln mature EONIA = 1.05% 2009 2010 Source : Bloomberg – IMF – European Commission – Dexia Asset Management
  • … but the ECB too early A schedule for the ECB Source : Bloomberg – IMF – European Commission – Dexia Asset Management
  • The surge in public debt will create new imbalances… The Debt Conundrum + 105% in 7 years + 111% in 7 years + 76% in 7 years Source : Bloomberg – IMF – European Commission – Dexia Asset Management
  • … and require large fiscal restrictions The Debt Conundrum Source : Bloomberg – IMF – European Commission – Dexia Asset Management
  • The fiscal exit strategy will penalize budgetary excesses… Euro Area - implosion or political test ? Source : Bloomberg – IMF – European Commission – Dexia Asset Management
  • … but will offer opportunities to investors Euro Area - implosion or political test ? Specific risk… Source : Bloomberg – IMF – European Commission – Dexia Asset Management * Composed by debt score (public deficit – debt / GDP) and economy score (GDP – unemployment – inflation) * Composed by spread adjusted to risk and to liquidity
  • Emerging economies have more favorable debt ratio trends… The virtues of the emerging economies In 2010, the debt of emerging economies remains relatively stable against the global public debt… … but over the last 10 years, its share in the global GDP has increased with 12% The public debt per capita ratio of the emerging countries is clearly below average Source : Bloomberg – IMF – European Commission – Dexia Asset Management
  • … and remain buyers of Western government bonds The virtues of the emerging economies
    • After the financial crisis, emerging economies seem reinforced.
    • They represent more than 35% of the global GDP but their share of the global debt remains low.
    • The Asian savings rates are high and could decrease in a long term perspective (shift from saving to spending)
    • But in the short term, the Asian savings could support the Western government debt
    Source : Bloomberg – IMF – European Commission – Dexia Asset Management
  • 2010 Trade recommendations Interest Rate Trades
    • Long TIPS
    • The Federal Reserve could continue to buy financial assets in 2010 and therefore increase its balance sheet. To tackle the unemployment issue, the Fed could risk higher inflation. US inflation could therefore face upside risks due to the accommodative monetary policy and higher commodity prices. Buy US inflation linked bonds 7 years segment
    • Euro curve flattener
    • The ECB has already laid out its roadmap for exit strategies. The normalization of liquidity conditions could allow the ECB to envisage the end of the full-allotment in Q2 2010 and the short term maturities could suffer from a rebound of Eonia. Anticipations of a tightening cycle will favor a flattening trade. Buy 10 year relative to 2 year
    • Long Greece against Spain
    • The current situation of Greece is critical due to a negative growth and high debt. Despite the recent downgrades by different agencies, we consider that the cheapening of Greece offers a buying opportunity. On the contrary, Spain has become too expensive in regards with the current economic situation. The level of unemployment combined with the critical housing market will weigh on the debt situation. Sell Spain 5 years against Greece
    • Long Netherlands against Germany
    • The economic and debt situation remain robust in the Netherlands. Dutch bonds give a pick-up of 20 bps with a comparable liquidity to Germany. Buy Netherlands 10 year against Germany
    • Long Emerging debt
    • Perspectives on growth are clearly positive (6% against 4% for the global growth in 2010) and the debt situation is much better and has improved relative to the developed countries. On a long term perspective, emerging markets offer a diversification with attractive yields. Buy Brazil or Russia
    Source : Bloomberg – IMF – European Commission – Dexia Asset Management Too Late Too Early Too Early Too Late FED ECB BOE Ireland Spain Greece USA
  • 2010 Trade recommendations Interest Rate Strategies Bullish Bearish 2s10s Steeper 2s10s Flatter Higher Lower Buy Area Sell Area Source : Bloomberg – IMF – European Commission – Dexia Asset Management
  • Agenda
    • Interest Rates Outlook
    • Currency Outlook
    • Credit Outlook
    • Synoptic Table
  • 2010 - the end of a disliked USD ? USD recent appreciation is premature… Rebound of the leadings, Rebound of the stock markets, Surge of positive data surprises End of Year positioning reversal Recent risk aversion due to Greek downgrades The market expects the Fed to hike in H2 2010 with a end year target of 1.1% Source : Bloomberg - DataStream – Dexia Asset Management
  • 2010 - the end of a disliked USD ? … but the current USD levels remain cheap in a longer term perspective “ Natural Funders” Low yieds with CA surplus Comeback of the carry trades Expensive EUR The USD follows long term cycles High short rates Sustained growth USD undervalued Restrictive monetary policy New Economy USD undervalued Danger Zone 1.40 Source : DataStream – Dexia Asset Management
  • JPY - still a lagging economy Japanese deflation, high public debt and weak internal demand will weigh on JPY US drastic quantitative easing helped to sustain JPY till now but … Japanese export driven growth will not be enough to bring GDP growth above 2% in 2010 Quantitative easing will persist for a while in Japan due to continuing deflation… 100 Source : DataStream – Dexia Asset Management
  • Norwegian krona benefits from good fundamentals… Potential for more appreciation 7.80 Cheap NOK is not yet back to fair value Comfortable Norway current account surplus Still a positive budget account Unemployment remains low and will sustain internal growth Source : DataStream – Dexia Asset Management
  • Polish zloty will outperform other Eastern European currencies… Poland’s prospects remain good for convergence Poland is not so bad positioned w.r.t. Maastricht criteria Polish growth remains positive Rate hikes will occur in 2010 PLN should recover toward previous crisis level 3.60 Source : DataStream – Dexia Asset Management
  • Agenda
    • Interest Rates Outlook
    • Currency Outlook
    • Credit Outlook
    • Synoptic Table
  • Don’t exit credit yet…spreads to tighten further in 2010 The rally has just started Source : Datastream – Dexia Asset Management 9 months of rally compared to 40 months of recovery on average since 1970 Credit market is remunerative on the long term… Outperformance generated 1 year after the bottom of the crisis (5.79%) exceeds the cumulative loss (-4.99%) $ Credit over 4 decades and 6 crisis
  • Exiting an economical recession context Source : Dexia Asset Management, Datastream, Moody’s, Federal Reserve, Bankscope Corporate activity is set to pick up 2-3 % growth has been an ideal environment for credit Ideal for investment grade credit Non performing loans cycle to peak at the end of Q2 2010 R² : 46%
  • Exiting an economical recession context Source : Dexia Asset Management, Datastream Monetary policy is not a risk Fed policy rate over the last 40 years Cumulated Spread changes before & after first rate hike
  • Balance sheet repairment supports credit in 2010 Source : Dexia Asset Management, Datastream, FDIC, Bankscope Further strengthening of the capital base From an ‘intensive care’ year into a ‘back to life’ year Deleveraging remains the focus US commercial banks
    • Towards a new banking system (BIS, CRD, National regulators)
    • ‘ More than a stricter regulatory scheme, the philosophy is to ensure that banks are sufficiently sound to refinance the real economy’
      • New regulation on capital
        • Higher minimum requirements
        • Better quality towards Core Tier 1 (equity, retained earnings)
        • Counter-cyclical provisioning philosophy
      • New leverage measure
        • Limit the balance sheet size
      • New liquidity constraint
        • 30 days liquidity coverage ratio & liquid assets buffer
    • Implications for Financial debt
      • Enhanced bondholder protection
      • Limited grandfathering of the current Tier 1 debt as capital: greater incentive to call
      • Current callable Lower Tier 2 debt will loose their capital status over time (step-ups will no longer be accepted)
  • Balance sheet repairment supports credit in 2010 Source : Dexia Asset Management, Bloomberg, Datastream, Moody’s Focus on revenues generation The cyclical rebound of non-financials Still in deleveraging mode Opportunistic merger & acquisition can surface again Corporate health is improving Aggresive costs cutting & capex reduction Default rate expectation tends to its long term average 4.8%
  • Balance sheet repairment supports credit in 2010 Source : Dexia Asset Management, Datastream US Banks increased liquid assets buffer Aggressive cost cutting & pre-financing increase cash on Non-fin balance sheets Liquidity stays at the central stage Non-financials supply – lower than in 2009 huge redemptions and pre-financing Reopening of the primary market for covered & senior bonds Desintermediation and liquidity focus New regulation will impose a minimum liquidity requirement Gross 260 bn Net -31 bn Gross 209 bn Net -14 bn Gross & Net 276 bn Gross 240 bn Net -94 bn Gross 375 bn Net -13 bn Gross 60 bn Net 38 bn
  • Credit Strategy 2010 Source: Dexia Asset Management, iBoxx, Datastream Spreads imply a default rate of 7.09% over the next 5 years versus 1.71% historically Risk premium accounts for 50% of yield Credit valuation is still attractive… Technicals favour credit bonds over sovereign bonds Credit - Equity premium is narrowing Rising dividend expectations will favour equity, however demand for credit from institutionals will remain strong
  • Credit Strategy 2010 Source: Dexia Asset Management, iBoxx Be long credit …financial sector remains our core strategy Relative attractiveness of the financial sector Switch from Non-financial defensive issuers into more cyclical issuers Telecom Italia - Telecom Pemex – Oil & Gas Veolia – Utilities Sabic – Chemicals Bertelsman – Media BAT – Tobacco Lafarge – Construction CEZ – Utilities Man – Industrials Favour improving fundamentals and better liquidity names within higher beta names Arcelor – Basics
  • Agenda
    • Interest Rates Outlook
    • Currency Outlook
    • Credit Outlook
    • Synoptic Table
  • Synoptic Table Source : Dexia Asset Management
  • Addresses Luxembourg Dexia Asset Management Luxembourg SA 136, route d’Arlon 1150 Luxembourg Tel.: + 352 2797-1 Belgium Dexia Asset Management Belgium Place Rogier 11 B-1210 Bruxelles Tel.: + 32 02 222 11 11 France Dexia Asset Management SA 40, rue Washington 75408 Paris Cedex 08 Tel.: + 33 1 53 93 40 00 Switzerland Dexia Asset Management Luxembourg SA succursale de Genève 2, rue de Jargonnant 1207 Genève Tel.: + 41 22 707 90 00 The Netherlands Dexia Asset Management Nederlands bijkantoor Lichtenauerlaan 102-120 3062 ME Rotterdam Tel.: + 31 10 204 56 53 Germany Dexia Asset Management Luxembourg SA Zweigniederlassung Deutschland An der Welle 4 60422 Frankfurt Tel.: + 49 69 7593 8823 Australia Ausbil Dexia Ltd Veritas House – Level 23 207 Kent Street Sydney NSW 2000 Tel.: + 61 2 925 90 200 Italy Dexia Asset Management Luxembourg SA Succursale Italiana Corso Italia 1 20122 Milano Tel.: + 39 02 31 82 83 62 Spain Dexia Asset Management Luxembourg SA Sucursal en España Calle Ortega y Gasset, 26 28006 Madrid Tel.: + 34 91 360 94 75 Bahrain Dexia Asset Management Luxembourg S.A., Middle East Representative Office Bahrain Financial Harbour, Financial Center, West Harbour Tower, Level 23 King Faisal Highway PO Box 75766 Manama Tel.: + 973 1750 99 00 Canada Dexia Asset Management Luxembourg SA Canadian Representative Office 155, Wellington Street West 6th floor Toronto, Ontario M5V 3L3 Tel.: + 1 416 974 9055 Money does not perform. People do.
  • Disclaimer Money does not perform. People do.
    • This document is published purely for the purposes of information, it contains no offer for the purchase or sale of financial instruments does not comprise investment advice and it is not confirmation of any transaction unless expressly agreed otherwise. The information contained in this document was obtained from a number of different sources. Dexia Asset Management exercises the greatest care when choosing its sources of information and passing on this information. Nevertheless errors or omissions in those sources or processes cannot be excluded a priori. Dexia AM cannot be held liable for any direct or indirect damage or loss resulting from the use of this document. The contents of this document may be reproduced only with the prior written agreement of Dexia AM. The intellectual property rights of Dexia AM must be respected at all times.
    • Warning : If this document mentions the past performances of a financial instrument or index or an investment service, refers to simulations of such past performances or contains data relating to future performances, the client is aware that those performances and/or forecasts are not a reliable indicator of future performances.
    • Moreover, Dexia AM specifies that:
      • in the case where performances are gross, the performance may be affected by commissions, fees and other charges;
      • in the case where the performance is expressed in another currency than that of the investor’s country of residence, the returns mentioned may increase or decrease as a result of currency fluctuations.
    • If this document makes reference to a particular tax treatment, the investor is aware that such information depends on the individual circumstances of each investor and that it may be subject to change in the future.
    • This document does not comprise any investment research as defined in article 24, §1 of Directive 2006/73/CE dated 10 August 2006 implementing Directive 2004/39/CE of the European Parliament and Council.
    • If this information is a marketing communication, Dexia AM wants to clarify that it was not designed according to the legal requirements to promote the independence of investment research, and it is not subject to any prohibition on dealing prior to the dissemination of the investment research.
    • Dexia AM invites the investors to always consult the fund prospectus before investing in a fund. The prospectus and other information relating to the fund are available on our site at www.dexia-am.com .