{"id":36842,"date":"2014-09-22T00:10:00","date_gmt":"2014-09-21T22:10:00","guid":{"rendered":"http:\/\/beta.next-finance.net\/opinion\/draghinomics-2\/"},"modified":"2019-12-30T23:04:52","modified_gmt":"2019-12-30T22:04:52","slug":"draghinomics-2","status":"publish","type":"post","link":"http:\/\/beta.next-finance.net\/en\/opinion\/draghinomics-2\/","title":{"rendered":"Draghinomics"},"content":{"rendered":"

Still the ECB surprised positively
\nand especially the currency responded strongly to the further
\nincrease in \u201ceasiness\u201d of the policy stance. The details of the
\nrate cut and asset purchasing program have been discussed
\npreviously in the economics part, but probably most
\nimportant for markets was that words (by Draghi) were
\nfollowed by action (of the ECB). <\/p>\n

Key is that this reflects an ongoing \u201cwhatever it takes\u201d-
\nmentality at the leadership of the ECB that keeps both the
\ncyclical recovery and sovereign QE hopes alive.
\nMoreover, it
\ninspires daydreaming about a European version of the
\nJapanese regime shift in policy setting that took place late
\n2012, known as Abenomics (after then elected Japanese
\nPrime Minister Abe), that could create an even more
\nsignificant asset price reflation in Europe than seen since the
\npeak of the Euro crisis.<\/quote><\/p>\n

The inspiring speech that Draghi gave in Jackson Hole did
\nindeed hint at a more wide-ranging shift in the European
\npolicy agenda. He not only emphasised that eroding inflation
\nexpectations justify further policy easing, but also pressed for
\nthe need of a more comprehensive policy impulse and
\neffective reform package that balances near-term demand
\nsupport (both fiscal and monetary) and enhancement of the
\neconomy\u2019s long-term growth potential.<\/p>\n

By further emphasising that the risk of doing too little
\ncurrently outweighs the risk of doing too much, both the
\nurgency and composition of the message from the ECB
\nPresident sounds remarkably similar to that of Japanese
\nPrime Minister Abe. However, whether Draghinomics will
\nmake a similar impact on European asset prices as
\nAbenomics did on asset prices in Japan remains to be seen.
\nDraghi\u2019s progressive thinking is certainly off to a reasonable
\nstart in terms of market impact, as bond yields and the Euro
\nare lower and equity prices are up in recent weeks. <\/p>\n

Still, it should not be overlooked that the size of the moves
\nseen so far remains far smaller than what was seen in Japan
\nafter the start of Abenomics.
\nFor example, the Euro is only
\ndown 4% in trade-weighted terms from its peak for the year,
\nwhile the Japanese Yen dropped around 25% as a result of the shift in policy settings in 2013. It remains early days,
\nhowever, to judge the impact Draghinomics as it took 4-5
\nmonths in Japan to generate the full impact on bond, equity
\nand currency prices.<\/quote>
\n The political hurdles for some of
\nDraghi\u2019s ideas remain formidable so a repeat of the Japan
\nexperience in Europe still seems a stretch, but further steps
\non a more cautious reflation path cannot be excluded.<\/p>\n

\"draghinomics_at_play.jpg\"<\/p>\n

The implications for our asset allocation stance are currently
\nmainly regionally of nature (closing our underweight in
\nEuropean equities, staying overweight in European credits),
\nbut if the impact of Draghinomics where to grow so will its
\nimpact on our allocation stance. It is not yet a reason to
\nincrease our overall risk-on stance, but has contributed to
\neliminating the concerns we had on disappointing growth
\nnumbers in Europe as a potential driver of future risk
\naversion amongst investors (and yes, the better German and
\nFrench data releases also helped here). If further traction in
\nespecially the currency market becomes visible, a renewed
\nincrease in risky asset exposure will certainly be considered.<\/p>\n

Fixed Income <\/strong><\/p>\n

We are neutral on fixed income spread products. Visibility on
\nthe economic recovery has improved and emerging market
\ntail risks have faded (although not disappeared). Also, in an
\nenvironment of easy monetary policy stances and low return
\nexpectations, the search for yield remains an important driver
\nof investor flows. However, technical factors are now less
\npositive and liquidity and gap risk have increased recently. <\/p>\n

Within fixed income spread products, we closed the
\nunderweight high yield. High Yield\u2019s relative valuation and
\nmomentum have improved after the sell-off while flows have
\nreturned. Liquidity within high yield nevertheless remains a
\nconcern. Euro Investment Grade Credits are neutral.<\/p>\n

We are neutral EMD HC and upgraded EMD local rates to
\noverweight. Investor flows returned to EMD as did
\nmomentum in local bonds. Search for yield and reform
\npotential (Indonesia, Brasil) may provide further support. We
\nkeep Eurozone Peripherals at a medium overweight as
\nfurther ECB action is increasingly likely and underlying
\nfundamental improvement is expected. <\/p>\n

Equities<\/strong><\/p>\n

Equities are a medium overweight. A moderate cyclical
\nsector allocation remains in place as we believe much of the
\ndata disappointment is weather-related and expect a growth
\nre-acceleration in the second half. We prefer Financials,
\nDiscretionary, Energy and Materials. Elsewhere, the stable
\ngrowth sectors remain underweight as they are still too
\npopular and expensive. Earnings are also providing welcome
\nsupport both in the US as well as in Europe.<\/p>\n

After the ECB measures we upgraded Europe from a
\nmedium underweight to neutral. The monetary policy cycle
\nand the earnings cycle may offer support for European
\nequities. However, we continue to prefer the non-European
\nmarkets. <\/p>\n

Regionally we prefer Japan. The country remains attractive
\ndue to lowered expectations, high earnings growth, attractive
\nvaluations and investor positioning. US is a small overweight
\nfollowing better than expected earnings and improving
\neconomic surprise indicators. Finally, we upgraded emerging
\nmarkets on fading cyclical risks for the region, attractive
\nvaluations and strong flow momentum. At the same time
\nlingering growth and system risks in China remain an
\nimportant risk factor.<\/p>\n

Real Estate<\/strong><\/p>\n

Real estate was reduced from a strong to a medium
\noverweight. Globally, fundamentals remain firm almost
\neverywhere in DM space and non-residential real estate
\nstarts to pick up in the light of a better economic outlook.
\nThe recovery started in the US but today also the UK,
\nGermany, Japan and, more recently, other parts of core and
\nperipheral Europe are improving in terms of house prices,
\nhome sales and unemployment dynamics. Chinese real
\nestate on the other hand sees his prospects deteriorating.<\/p>\n

Commodities<\/strong><\/p>\n

Commodities are on a small overweight. Global cyclical
\nindicators and some improvement in selective Chinese data
\nprovide support. Meanwhile, El Nino probability has come
\ndown but could flare up again and some supply side
\nsqueezes in (non-US) agri and metals components might
\narise on the back of this. Also, geopolitical risks remain
\nomnipresent while non-commercial positioning in key segments (Energy, Agriculture) came down substantially. At
\nthe same time, uncertainty with respect to the outlook for
\nboth growth and stability of the financial system in China
\noffers a potential headwind for commodities.