{"id":53401,"date":"2016-06-21T02:27:00","date_gmt":"2016-06-21T00:27:00","guid":{"rendered":"http:\/\/beta.next-finance.net\/strategie\/allocation-june-2016-put-up-the-umbrella\/"},"modified":"2019-12-31T00:51:30","modified_gmt":"2019-12-30T23:51:30","slug":"allocation-june-2016-put-up-the-umbrella","status":"publish","type":"post","link":"http:\/\/beta.next-finance.net\/en\/strategie\/allocation-june-2016-put-up-the-umbrella\/","title":{"rendered":"Allocation June 2016: put up the umbrella?"},"content":{"rendered":"

Is it now time to take partial profits? Although the
\nyear is clearly far from over, the three factors likely to kick-start the markets, that we have been
\nmonitoring for several months, appear to be losing momentum and, at the least, other themes are
\nrequired to extend the rally.<\/strong> <\/em><\/p>\n

We were counting on an oil price rally to alleviate several of the fear factors present at the
\nbeginning of the year. The US energy industry was caught in a downward spiral. Deflationary
\npressure from falling energy prices maintained the impression that monetary policies were
\nineffective. Since then however, as we foresaw, the price of crude recovered. Global trade remains
\nsluggish however and supply still outweighs demand. It would therefore appear that the latest rally
\nhas been driven by speculative buying, as illustrated by the build-up in long positions among
\nfutures contracts.<\/p>\n

Long positions among futures contracts on the Brent<\/strong>
\n\"long_positions_among_futures_contracts_on_the_brent.jpg\"<\/a><\/p>\n

If, as we are expecting, oil prices
\nremain flat, the positive impact that
\nthe rally has had on several other
\nasset classes may be undermined.
\nFor example, the US high yield
\nmarket was driven by fresh
\noptimism regarding the oil-price
\ntrend, with spreads narrowing in
\nthe wake of the US crude price
\nrally.<\/p>\n

Oil price and US high yield<\/strong>
\n\"oil_price_and_us_high_yield.jpg\"<\/a><\/p>\n

This situation may also be
\ncomplicated by the Fed
\nadopting a more hawkish
\ntone. The US central bank
\nhad deferred taking action
\nfollowing market weakness
\nand amid fears in the
\ninternational setting. This was
\nthe second catalyst for a
\npotential market rally in our
\nopinion. However, Janet
\nYellen has now had to satisfy
\nthe Fed hawks and has once
\nagain stressed the
\nimprovement in the US
\neconomy in order to justify
\npossibly resuming monetary
\ntightening. The difficulty is
\nthat US long-term rates,
\nwhich had tracked short-term rate expectations (in this case the 3-month euro-dollar future), will
\ncertainly steepen again. US companies, which are still weathering a slowdown in several economic
\nindicators, will have to face less advantageous financial conditions, just as margins are contracting
\ndue to stagnating sales combined with slight wage pressure. As a result, the short term outlook for
\nWall Street now seems more uncertain.<\/p>\n

US: 10y interest rate and short-term rate expectations<\/strong>
\n\"us_-_10y_interest_rate_and_short-term_rate.jpg\"<\/a><\/p>\n

Chinese stimulus measures were the third factor supporting our interest for risky assets. From this
\npoint of view, investors seem to have ruled out the risk of a hard landing in the Chinese economy
\nin 2016. However, China\u2019s financial situation is becoming increasingly worrying, with debt levels
\nsurging since 2008. Over the past 15 years, Chinese debt has grown three times more rapidly than
\nthe economy. Corporate and household debt together equal 207% of GDP. Government debt is estimated at 40 – 55% of GDP. It is problematic for an emerging economy to have an equivalent
\ndebt level to industrialised countries (250% global debt\/GDP ratio). There is therefore a risk that
\nmarkets will penalise this type of credit-driven growth, which is unsustainable over the medium
\nterm, once investors are reassured that 2016 has been preserved.<\/p>\n

Evolution of Chinese debt<\/strong>
\n\"evolution_of_chinese_debt.jpg\"<\/a><\/p>\n

Several factors are therefore clouding the horizon for the markets and the best policy is
\nundoubtedly to remain patient, while setting up hedges or taking partial profits. Given the
\nforthcoming electoral incertitude in Europe and in the US, market volatility should provide some
\nbetter investment opportunities. Although the weather and the climate are, of course, two different
\nthings and the horizon may clear progressively, it would be wise to acknowledge that a number of
\nthreats are currently looming over the markets, which could cause a sharp drop in returns in
\nEurope, just like the current temperatures!<\/p>\n