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Weekly – Investment Adviser


Equities Bonds
MSCI World +23.9% CHF Corp +2.7%
S&P 500 +27.3% US Govt +6.7%
Stoxx 600 +22.6% US Corp +14.2%
Nikkeï +19.2% US HY +14.0%
SPI +29.4% EUR Gvt +8.5%
China +33.8% EUR Corp +8.2%
Emerging +14.8% EUR HY +9.4%
Currencies Commodities
USD index +1.3% Gold +15.1%
EURUSD -3.0% Silver +9.8%
EURCHF -3.3% Brent +22.8%
USDCHF -0.1% CRB index +8.6%
USDJPY -0.1%
EM FX -1.8%

Last line of resistance

PBoC chief Yi Gang declared on December 1st:

We should not let the money held by the Chinese people become worth-less,” …“Maintaining positive interest rates and an upwards inclined yield curve is generally conducive to the economic entities, and in line with the Chinese people’s saving culture, thus beneficial to the sustainable development of the economy.

Article published in Qiushi, a journal of the Communist party


Chinese prudence actually rhymes with orthodoxy

The declaration of intent is crystal clear. China long-term strategy, ultimately, aims at disconnecting its monetary policy from the rest of the world, i.e. essentially from the USD zone (say de-dollarization). This is totally consistent with other ongoing processes engaged by the communist party a) the Renminbi internationalization b) the Silk Road project c) the IT confronta-tion / war with the US.

The basic theory is that, maintaining positive interest rates (and steep yield curve) is benefitting to the economic agents (and investment) and to the Chinese people’s culture (protect the savers). In this respect, China will continue to implement a “normal” monetary policy, if possible, provided economic growth remains in a reasonable range and inflation mild. The country neither intends to implement zero or negative policy rates, nor quantitative easing, despite world’s major economies entering the zero interest rates world.

Supply side reforms are easy to call, but will prove harder to implement especially if growth keeps faltering.


Chinese disconnect spells four important implications

If China really maintains this direction, Yuan relative attraction (as a high yielding currency) will rise. A relatively stable to strong Yuan would spell a paradoxical alignment of interest with the US. Indeed, a relatively strong Yuan may mechanically help the weakening of the greenback and vice versa.

In principle Chinese bond yields tend to follow, more than less, the trend and the direction of their US peers. This is very logical on two aspects. First, the two economies have been growingly more interconnected (courtesy of more intense globalization last decade) and China needs lots of US dollars to pay for the vast quantity of commodities it consumes. China is also dependent on the US financial and payment systems for its international activities (hence also the former ¨pegging¨ of its currency to the USD). In short, China voluntarily joined the orbit / imported US monetary policy. Therefore, China attempted to avoid major disconnects from USD currency zone, up to now.

US and Chinese 10y government bond yields

Is 3% a red line for Chinese bond yield?

PBoC affirms that the expansion of fiscal policy, as well as further restructuring of the economy, should replace former domestic policy / measures (say unbridled credit expansion) and Western countries type of financial repression (ZIRP, NIRP, QE, etc.). Such a shift would be of paramount importance, if confirmed by Chinese Central Economic Work Conference 2020 (whose detailed conclusions are to be published shortly).

Chances of a “phase I trade deal” with Trump administra-tion are not insignificant as:

  1. China may gladly provide Trump with a ¨victory¨, by agreeing on a currency pact
  2. Buying US commodities may address raging domestic food inflation (pork crisis)

Supply-side reforms would induce tensions on employment.
A too low pace of growth – for too long – would contradict the communist party engagement to deliver prosperity and rising living standards to its population.

  • Chinese Yuan and bonds may become growingly attractive in the sea of zero or negative rates
  • But, ultimately, the Chinese orthodoxy will also be challenged by ageing of its population and by endemic low productivity of its SOE – State Owned Enterprise


Fixed income. Central bankers neither hawks nor doves

As expected, the Fed did not change its Fed funds target rate after 3 cuts in a row. The FOMC thinking, that thecurrent stance is appropriate, is now included in the statement, even if the challenges – slower global growth, trade war and muted inflation pressure – are still there. Dots have shifted to neutrality. 13 out of 17 FOMC members are now expecting unchanged Fed Funds throughout 2020, while 4 are expecting one hike. A big shift has happened as no one signals a cut. This is quite different from the market pricing, which is still discounting a full cut next year. Recently, the dots included a more dovish bias. Fed Chair Powell basically ruled out any rate hike if inflation remains below 2.0%.

The inaugural ECB President Lagarde press conference did not deliver any major surprises but gives food for thought. The ECB left interest rates, QE purchases and forward guidance unchanged, as widely expected. In its macroeco-nomic assessment, the most remarkable change was a slightly more positive tone, as the downside risks have become somewhat less pronounced. The staff projections do not point to improvement in the eurozone economy.

The 2020 growth forecast was slightly revised down-wards to 1.1% and left unchanged in 2021 and 2022. The projections brought very little change to the inflation forecasts. For the next 3 years, inflation is expected to come in at 1.1% (from 1.0%), 1.4% (from 1.5%) and 1.6%. Lagarde added that the 2022 inflation forecast masked a slight upward trend, ending the year at 1.7%. An inflation rate of 1.7% at 2022 year-end is pointing into the right direction but not enough to be satisfactory. Lagarde said that the Eurozone economy was getting close to potential in the medium term, which eventually could argue against a very accommodative monetary stance. She added that she won’t revisit past policy decisions, while at the same time she said that the effectiveness and appropriateness of past measures will be examined in the coming strategic review.

  • Further cuts seem to be off the table, at least with the current macro projections
  • A wait-and-see looks the best positioning for year-end


Equities. Appetite for risk should remain

Phase One of a larger trade agreement between the United States and China, Brexit, continuation of accommo-dative monetary policies in 2020, as well as presidents of the European Commission and the ECB resolutely turned towards economic recovery through environmental infrastructure are points that should maintain investors’ interest for equities.

But stock valuations incorporate a lot of good news and the improvement in soft manufacturing indicators must be validated by hard data. In sympathy with reflationary expectations, the price of copper recovered. After a zero-growth in 2019, earnings per share should increase in 2020 with bottom-up estimates at +10% in the United States. Profit growth will still be weak in 4Q19 to accelerate in 1Q20, but confirmation will only take place in 4 months, when the results of 1Q20 will be published in mid-April 2020.

The index of economic anxiety (see graph, black curve), calculated on the frequency of negative economic news around the world is, unsurprisingly, at an all-time high with the current de-globalization and the US-China trade war. But that had no impact on the investor anxiety index, the VIX, because whenever the scary situation was, central bankers, the Fed first, stepped in.

Global economic uncertainty index - 19.12.19

An unloved bull market. The euphoria, which generally kills an expansion of the indices, never materialized, which explains, perhaps, the longevity of this bull market and the absence of powerful selling forces. Investors’ cash allocation is important. Some believe volatility in stocks is low, because economic volatility is also low. Others explain this bull market by passive management or the rise of social media with their lots of fake news which push investors to become skeptical about news.

  • December and January should remain favorable for equities


Equities. A green pact for Europe

Europe wants to become the world’s first climate neutral continent by 2050 and reduce CO2 emissions by 50% by 2030. The European Commission presented last week a set of ambitious measures, The Green Pact for Europe, for a sustainable ecological transition. The funding is still unclear. The Green Pact for Europe can be a new growth strategy.

The European Commission has presented a roadmap with the implementation of actions / laws between 2020 and 2021, affecting the climate, clean energy (electricity production), sustainable transport (trains, cars), renovation buildings, the circular economy involving industry, agriculture and biodiversity.


  1. Decarbonize the energy sector,
  2. Renovate buildings,
  3. Push industry to adopt the circular economy,
  4. And deploy decarbonized private and public transport.

Investments will be substantial, estimated at € 260 billion per year, or 1.5% of European GDP, mobilizing public and private funds. It will also be necessary to pay attention to the right balance between green regulatory constraints and green investments to have net positive economic growth. It will need an alignment of governments to go in the same direction. There are already tensions with Poland, Hungary and the Czech Republic which consume lots of coal and the ecological transition could cost them dearly; they want more financial aid from their European partners.

A study by The Guardian estimates that 20 companies have been responsible for 30% of global CO2 emissions since 1965: Aramco (#1), ExxonMobil, Total, Gazprom, Chevron, BP, Shell, Petrobras, Pemex, Sonatrach, PetroChina, Coal India, Petroleos, Peabody Energy, ConocoPhilips, Abu Dhabi National Oil, Kuwait Petroleum, Iraq National Oil, National Iranian Oil and BHP Billiton.

Between private and public interests, the answers for the climate are difficult. The recently COP25 climate conference reflects this with an agreement a minima despite the call of scientists and young people.

No agreement on international carbon market rules. The adopted texts do not respond to the urgency for radical and immediate actions. The big polluters, China and India, have not raised their ambitions. The other major polluter, the United States, was not present at the COP25 in Madrid, since it will come out of the Paris agreement. Only Europe wants to be the leader against global warming.

The theme of Green New Deal is investable. It incorporates responses to the fight against global warming, the investments of which will also boost economic growth.

  • Favour the theme of the Green New Deal
  • Give priority to electricity producers such as Iberdrola, RWE, Enel, Nextera, the wind turbine manufacturer Vestas or manufacturers such as Itron and Landis & Gyr with their smart meters necessary for energy efficiency (Smart Grid, Smart Cities, Smart Houses)


Equities. 5G development will accelerate in 2020

Former Federal Communication Commission (FCC) boss, Reed Hundt, said there is a need to move faster in the deployment of 5G. The United States needs to have a solid 5G network and must not be left behind China. It’s a national imperative. For him, the first immediate step is the validation of the T-Mobile and Sprint merger. Facing China, it is more important to have strong operators than to oppose the merger to have more competition and favor the consumer.

2020 will be an important year for 5G, as smartphone manufacturers enter the market with 5G products. Asia is moving very fast, the United States a little slower, but Europe is lagging behind.
Europe is the weak link, as usual in a multipolar world and barely counts in the technology sector. Nokia and Ericsson are caught in the war between Americans and Chinese. Donald Trump puts insane pressure on Europe to exclude Huawei from tenders. Germany and Great Britain hesitate. Europe is afraid of American reprisals if Huawei were to install infrastructure. China has just threatened Germany and its automotive sector, if Huawei were excluded as a supplier of 5G equipment, recalling that German cars have 25% of the Chinese auto market.

The challenge of 5G is immense for the United States and China: cloud gaming on smartphones, Internet of Things, artificial intelligence and machine learning. Europe should be worried about being dumped on all these subjects. Europe has 2 companies that can compete with Huawei, Nokia and Ericsson; it would be strange if Europe did not support them by buying Huawei equipment. But once again, Europe is weak and missed a clear vision as with the refusal by the European Commission to merge Alstom and the railway activities of Siemens which was to give birth to a European railway group capable of competing with the Chinese.

  • The 5G theme remains interesting
  • But the US-China technological war will escalate, and Europe, in the middle, could take a few hits



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