What is the biggest risk facing markets today?


  • Banking
  • Saturday, 15 Feb 2020

WHILE the world is now panicking on the severity of the coronavirus (Covid-19) outbreak, from a financial standpoint, how should investors react? Also is the epidemic risk the biggest risk the market is now facing?

Or is an 11-yearold bull market the underlying bigger issue that everyone seems to have forgotten?

Amundi Asset Management senior equity strategist Ibra Wane says that the lessons of the past show that when a risk is not systemic it can easily mutate into a buy opportunity. Conversely, being too optimistic is also a waste of means.

These were some of the things Wane shared with StarBizWeek when he was in Malaysia recently.

Wane is senior equity strategist for Amundi Asset Management, a position he has held since 2008. In the past, Wane has received many French and International distinction awards as an Analyst.

He was also an economist for French think-tank SEDES-CREP and held various missions for the World Bank.

Wane holds a Master Degree of Economics from the University of Grenoble, a MBA from Institut Supérieur de Gestion in Paris and is a certified investment analyst from the CFAF (Training Centre for French Financial Analyst. He was also Board Member of SFAF, the French association for financial analysts and was chairman from 2010 to 2011.

Amundi Asset Management senior equity strategist Ibra WaneAmundi Asset Management senior equity strategist Ibra Wane

Amundi manages 1.65 trillion euros of assets across six main investment hubs as of Dec 2019. It is Europe’s largest asset manager by assets under management and ranks in the top ten globally.

Headquartered in Paris, Amundi was listed in November 2015.

Below are excerpts of StarBizWeek’s interview with Wane.

Are you concerned about the bull market which has gone on for 11 years? Many are predicting a recession after the US Presidential elections. What is your opinion on this?

Focusing on the US market – the heavy-weight of global equities – it’s fair to say that since the trough of 2009, the recovery of the US market is the longest ever recorded (since 1857!), the equity rally has been impressive (S&P 500 price index multiplied by 4.4 times time over the period) and after such a bull market, valuation looks stretched from an historical perspective.

Recovery cycle

Having said that, if the US recovery cycle is admittedly old, it has not been particularly strong and you have to have a trigger to stop it, which is not on the cards.

There are usually, three kinds of triggers to stop a cycle: an external shock like the doubling of the oil price as in the seventies or closer to us in 2008, an excessive tightening of financial conditions or the explosion of a credit or real estate bubble.

Of course, here and there you have fragilities, for example the budget deficit is quite high at this stage of the cycle, the trade war should remain present, in some segments the quality of credit is deteriorating, second derivatives of the labour market are weakening... But, at the end of the day, with an unemployment rate at a 50-year-low and some wage growth, the biggest engine of the US economy – consumption – remains robust enough.

In the meantime, the US economy should be sustained by some new fiscal incentives targeted to low-middle class voters. At the same time, the Congress being split, this should limit those incentives and the retro effect afterward.

Having said all that, how would you strategise your portfolio under such a scenario? What would the asset allocation be like, in order to enjoy some growth, at the same time to minimise risk?

We remain constructive on US and global growth for 2020 but one should not be complacent. Valuations are already stretched, monetary policy has shown its limits, the current lull in the trade war could prove shaky and new risks can erupt as evidenced by the Middle East tensions or the Covid-19 now.

Therefore, we are positioning our portfolios in line with a continuation of the cycle, which means that we remain constructive on risky assets. We are “overweight” on credit and “neutral” on equities.

At the same time, we maintain a reasonable hedge, which is typically in US treasuries, US dollars and gold, to cope with possible surprises.

What is your appetite for equities and how important is it to be part of our allocation this year? The appetite for equities have increased since the end of last year, particularly with US consumer figure still being strong, and the knock on effect from the trade slump, that everyone was anticipating, but never really happened.

Until very recently, our Global Composite Economic Momentum Index, based on four regions and seven variables (earnings revision, long-term interest rates and certain leading indicators) were pointing to a mild rebound in the first part of 2020 due to base effect and the reduced likelihood of a trade war escalation. In turn, this was advocating for a risk-on mood and a higher appetite for equities.

The unexpected surge of the coronavirus issue will probably delay that. It is too early to assess the potential impact of this epidemic on global growth but investors dislike uncertainties.

The reference point that everybody has in mind is the SARS episode of December 2002 to June 2003 which at the time shaved approximately 1% of China’s GDP. This is why we’ve started to see a come-back to classic safe havens.

In your stock selection, how do you identify what stocks to buy? What are some of the key criteria you look out for?

For decades, the classic investment approach was mainly based on assessing the earnings dynamic and valuation and more incidentally on the strength of the financial structure, the environment and the business model of the company itself.

Then, in the early nineties the hurdle rate for investment or value creation became the yardstick. Since the Great Financial Crisis and the nosedive of return of equity in many sectors, investors have become more discerning and pay now a greater attention to sustainability.

In retrospect, looking at how ESG (environmental, social and governance) investing can make the difference in term of performance, a research paper of Amundi from 2018 concluded that, if it was not obvious before 2013, it has become increasingly true globally since 2014, and notably in Europe where investors were more familiar with this approach.

As the other regions are progressively following the same path, it should not be a surprise if ESG criteria influence is on the rise.

In your opinion, what is the biggest risk to the market now? How things have changed in a matter of two months. From the trade war to the Covid-19. What are the indicators that you watch out for?

There is different kind of risks encompassing macroeconomic, geopolitical or financials aspects.

At this stage, macroeconomic issues are not bright but are not the most acute either as global growth should stabilise around 3%, interest rates are poised to stay low and central banks remain accommodative. Having said that, risks are tilted to the downside. Geopolitical risks are multiple and barely predictable. In the space of a month, the focus of the market has switched from Trade issues, to Middle East and now the Covid-19 epidemic.

The dangers here are twofold: to exaggerate risks or conversely to become too optimistic too early.

The lessons of the past show that when a risk is not systemic it can easily mutate into a buy opportunity! Conversely, being too optimistic is a waste of means. During the SARS episode, between the outbreak of the epidemic in Hong-Kong and the trough of the market, it took three months!

From a financial stand point, to monitor these developments you have a battery of indicators.

The problem is that if most of these indicators have recently worsened, their starting point was rather complacent, suggesting it’s too early to come back yet.

Eventually, the biggest risk is neither macroeconomic or geopolitical, barring a disaster, but financial.

Eleven year after the start of the Great Financial Crisis, global growth is decent but the side effect of the non-conventional monetary policy and low (when not negative) interest rates are becoming increasingly visible through higher leverage and inflated asset prices.

The subsequent question for the authorities is how to regain control without provoking a debt crisis.

What are some of the investment trends that you are paying close attention to now? (eg: China/autonomous driving/ end of high oil prices/digital payments)

In a fast changing world, where unprecedented innovations are disrupting long established players, it is crucial to detect and invest on the long lasting trends.

Thematic approach

With this in mind, Amundi and its subsidiary CPR Asset Management have developed for years a thematic approach based on megatrends; ageing population (the silver economy), new lifestyles (needs for belonging, self-esteem and self-actualisation favor for say social networks, luxury and leisure and relies increasingly on digitalisation), education and climate action are a few examples.

More largely, ESG criteria that Amundi pioneered since its creation in 2010 will become more and more central.

As of today, Amundi manages about 20% of its total assets under management according to ESG criteria.

The ambition is to double that by 2021 and to become 100% ESG in active open funds in particular. This is a strong signal to businesses we look to invest in.

We have accordingly developed our own methodology to select stocks. If one should avoid ‘green washing’ to be credible, this selection must be applied with discernment by taking into account the specificity of each country as the “overbidding for exclusions” would be counterproductive as well.

For this year, what sector or country or asset class in particular would you be paying close attention to? What are some of the things you think we should be looking, that the market has yet to pay attention to?

Taking into account the upside and volatility, the best risk reward remains in credit. Within credit, we favour the euro investment grade corporate bonds which benefit from the open-ended asset purchases of the European Central Bank.

Within equities, our models suggest a higher upside for eurozone or emerging equities than for US equities.

Having said that, the difference is limited and given the safe haven status of the US market, this might not materialise immediately. In term of style, the current circumstances advocate to continue to focus on Quality and to gradually raise the share of value.

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