From one-man show to teamwork – the new style at the ECB?

9 minute read

No sooner had Mario Draghi finished his press conference in September that the deep divisions within the ECB governing council were laid bare. In an unprecedented action, the heads of the Austrian, German, French and Dutch central banks publicly criticized the policies their institution had just announced. Some members thought the new stimulus was sending the wrong signals to the market, while others thought quantitative easing (QE) should only be used during a financial crisis. A few days later, Sabine Lautenschläger, Germany’s representative on the ECB executive board, abruptly resigned. Adding insult to injury, a group of former central bankers later published a memo lashing out at the ECB’s loose monetary policy.

This is not exactly a cheery atmosphere to start a new job, you might think. But for Christine Lagarde, the new president of the ECB, it is a golden opportunity to turn things around. An impeccable diplomat, she could be the right person at the right time to stop the bickering, heal the divisions, and align the current ECB members. Mr. Draghi always made a large impact on the final decisions at ECB, but now there is little support for a one-man show. We think creating more of a team in the ECB governing council could be more important than future monetary decisions per se. Ms. Lagarde will probably also use her role to build a bridge between fiscal and monetary policy and to press ahead with more European integration to increase inflation, while respecting the independence of both sovereigns and the central bank. How people react to her first press conference next month will provide clues as to whether the mood at the top of the ECB is changing.

On a tactical horizon, we have changed our overweight in fixed income to neutral. Also, our previous underweight in equities has been rebalanced to neutral. Finally, we remain neutral on alternatives.


Within Fixed Income:

  • We are underweighting government bonds this month.
  • Investment-grade credit, high-yield bonds and emerging market debt have an overweight.
  • Securitized debt remains neutral in the fixed-income model portfolio.
  • The overweight categories offer a spread pickup versus (low-yielding) government bonds, leading to this relative positioning.

Within Equities:

  • We have an overweight towards US equities and emerging-market equities.
  • All other equity categories are either neutral or negative this month.

Figure 1: Our asset class overweights/underweights in our model portfolio as of November 1, 2019 on a 3-month horizon. Each percentage reflects the relative weighting of the different asset classes within our model portfolio.

Fixed income – Government bonds

US: Modestly positive. Fundamentals are still modestly positive. Real GDP grew by 1.9% annualized over the third quarter, a touch softer than in the second quarter. Consumer spending saved the day, as a weakness in trade and investment roughly cancelled gains in government spending. The trade spat between the US and China continues to grab investors' attention. If US tariffs on Chinese imports indeed go into effect this year, it will compound the slowdown in US and global economic growth. We think it's unlikely the two countries will reach a grand deal anytime soon. The Fed is trying to soften the economic impact through its accommodative policy We think there will be two more rate cuts by mid-2020, but it will be highly dependent on trade developments.

Treasury yields remain above their near-term lows, keeping valuations somewhat reasonable. 10-year Treasuries are still rich compared to other currency-hedged developed sovereigns, but less so recently, and they are still cheap if unhedged. We are also neutral on sentiment. Technicals are close to neutral. The market has pulled back once again from testing the 2016 lows in yield, although the intermediate-term trend to lower rates remains intact. Momentum is now towards higher rates on a daily and weekly basis, and monthly momentum towards lower rates is slowing.

Europe: Negative. Little has changed in this asset class. Fundamentals are still positive, but overall, fundamentals are not looking good. Europe's economy is still expanding, but the growth has slowed due to softer external demand and challenging conditions in manufacturing. The risk of a recession in the eurozone has increased. Geopolitical risks are very much present and have again been affirmed by Turkey's invasion of northern Syria. Valuations are still very negative, as German yields have deviated from any measure of "fair value", as estimated by nominal or real growth. The attractiveness of issuing at historically low yields in the (ultra) long end of the curve is still motivating steeper curves across eurozone countries. Extremely low yields, a weak economic picture with downside risks, and support by the ECB are keeping the curve flat in the shorter end. Sentiment is still negative and volatility indicators have increased for highly rated sovereigns. Technicals are neutral. The medium and ultra-long down trend in yields is yet unbroken. Yields have found strong support at -72bps and have traded higher from these levels.

UK: Positive. Fundamentals have improved to positive from neutral last month. The latest round of PMIs show that the Manufacturing PMI is now at 48.3 and Services 49.5. The labor market is a bright spot and inflation is above the Bank of England's target. Valuations are negative, but less so than last month as investors start to price in a less disruptive world due to modest progress on Brexit. Sentiment and technicals are neutral.

JapanNeutral. Fundamentals remain positive. The 10-year rate bottomed out to as low as -28bps, but has moved higher in line with the other big markets. Economic growth is slowing, confirmed by a weaker Tankan report (short-term economic survey of enterprises in Japan), but the growth was better than expected. A big debate right now is how much stimulus the Bank of Japan can still add before further rate cuts start to harm the economy. Valuations are still very negative as the 10-year rate trades below zero due to buying by the Bank of Japan and slow (global) growth. The Taylor rule suggests a much higher official rate, which is a clear indication of the expensiveness of the Japanese market. Sentiment and technicals are positive.

Fixed income – Investment-grade

US investment-grade: Modestly positive. Fundamentals remain neutral. US economic data has been worsening of late, as highlighted by most recent Institute for Supply Management (ISM) data. Growth is returning to trend levels (not too hot + not too cold = good for corporate bonds). Recent bank earnings were OK. We are watching Industrials very closely. At a micro level, corporate leverage remains high. Valuations are negative. Spreads remain fairly rich versus their long-term average, and adjusting for leverage and duration they look even less attractive. Credit curves are steep, particularly the back-end. Sentiment is neutral, while technicals are very strong. We have now entered a seasonably lighter period of supply between until year-end. Foreign demand is starting to come back to scoop up the last bit of yield left in the asset class. The yield advantage in the U.S. should drive demand and inflows.

European investment-grade: Neutral, unchanged. Fundamentals are still negative. The overall macroeconomic picture is weakening. PMIs are below 50 with no improvement in sight. While the manufacturing PMI of France still looks decent at 50.1, German industry is under pressure with a PMI of 41.7. Valuations are neutral. The European investment-grade spread stayed roughly the same over the last month. Spreads still have some room to tighten now that the ECB has restarted QE. Sentiment is also neutral. A lot of things we have worried in recent months are getting resolved: Brexit seems to be moving toward resolution and Italy has gotten its act together. Technicals are strong. Over the last few months, supply has picked up considerably and the restarting of QE by the ECB creates extra demand.

Fixed income – High yield

US high yield: Negative. Nothing has changed in this asset class. Fundamentals remain neutral. For the most part, the US economy continues to provide a relatively supportive backdrop for US high-yield companies. We have seen more upgrades than downgrades this year. Commodity prices remain volatile, and the sell-off in West Texas Intermediate (WTI) has resulted in further energy underperformance. Valuations are negative. Spreads have widened modestly from our previous House View, but are off the wides we saw at the beginning of October. Yields remain well below 6%. Sentiment is balanced. Technicals are positive. During the last month, flows have oscillated in and out. After August's YTD low, there was a resurgence in issuance in September while October was trending below average.

European high yield: Negative. Fundamentals remain negative. European economic indicators continue to deteriorate, fuelling fears of a recession. Company results are also deteriorating in general and several outlooks have been revised downward. Defaults are rising. Valuations are also negative —we are near all-time tights. There has been a lot of dispersion between BB and single B. High-quality paper has done dramatically well, but single C and CCC have lagged. At some point, this could be an opportunity should the economy turn around. Overall sentiment still seems defensive. The market is cautious for recession risk, but there is a lack of yielding alternatives. Technicals are neutral. BB will remain supported by ECB buying. A lot of investment-grade buyers are in this space too. Flows are muted, supply is increasing and premiums are limited.

US leveraged loans: Negative. Fundamentals are neutral. Earnings are generally growing except in retail and chemicals. GDP growth of 1.5-2.5% is still a decent backdrop and default expectations remain low. Valuations are neutral. BBs have rallied back much faster than single Bs. Sentiment is slightly negative as lower expectations of future interest rate hikes have dampened demand for this asset class. Technicals are neutral. Mutual fund flows have been negative in the last eight months and will likely continue to be so. Primary activity has been active throughout 2019, but the deal quality remains poor, with many aggressive BBB deals continuing to print. CLO creation continues to be the largest buyer of US leveraged loans.

Fixed income – Emerging market (EM) debt

Emerging markets: Positive. Fundamentals remain negative. Global growth has been downgraded, but if trade talks improve, growth in China could stabilize. Real rates in emerging markets are still high. With inflation expectations declining and growth disappointing, expect widespread easing by emerging-market central banks. The weakness of developed markets does weigh on this asset class, but the differential still favors emerging markets. Valuations are attractive, with the cheapness coming from the high-yield segment rather than the investment-grade, hard-currency debt segment. We think emerging-market hard-currency spreads will tighten by around 25 bps and that emerging-market local markets will post modest returns until year-end. Yields have hit an all-time low.

Sentiment is strong. The US-China trade talks are still shrouded in uncertainty. The US-China partial "Phase One Trade Deal" removes the immediate escalation of near-term trade tensions. But it is still unclear whether the actual deal will be signed and the planned December tariffs will be cancelled. In fact, we doubt that this current US administration will produce any definite megadeal. We think the trend is toward mini trade deals with China. Most emerging-markets benefit from higher oil prices, but any positive impact here could be negated by an increase in risk aversion from the rising tensions in the Middle East. In short, Fed rate cuts, mini trade deals and the potential for USD weakness provide a positive backdrop. Technicals are supportive.

Fixed income – Securitized

US securitized: Modestly positive. Fundamentals remain healthy and stable in most securitized sectors. While delinquency and default trends in certain ABS sectors have increased, the current levels are not worrying. The housing market is showing signs of moderating. The pace of appreciation in home valuations has slowed. We are monitoring affordability very closely. Valuations are modestly positive. Most sectors remain off the 52-week tights achieved last year, which leaves room to tighten. Agency MBS (nominal and option adjusted) widened slightly month over month and still appear somewhat attractive. Implied volatility has moved much higher over the last few months, which is positive for the sector, but convexity is very negative. We expect spreads to be rangebound to a touch tighter over the next few months. Sentiment is neutral and the overall supply/demand technical picture is positive. Issuance increased at the start of Q4, but it is being met with strong demand. ABS techhnicals are negative.

European securitized: Modestly positive. We are neutral on fundamentals. Consumer fundamentals look healthy, while cracks have appeared at the macro level. Arrears are stable to improving and CPRs are still high. Credit conditions have tightened. Valuations are a tad positive this month. Spreads were broadly stable month over month. The move in rates is generating negative returns, as floors on coupons/Euribor are creating longer-duration securities, mimicking fixed-rate bonds. This is not fully priced in. CLO spreads are broadly stable, with the credit curve flattening in the "A" part and some widening in BB and in lower quality. The relative value for ABS is still very attractive compared with covereds and corporates. Sentiment is neutral as investor interest in ABS is still strong, tempered by the ongoing concerns about Brexit, the trade war and recession fears. Technicals are modestly positive.


USD: Neutral. The US dollar held up well in September as a repricing by the Fed eased expectations and US yields backed up. The latest ISM reports indicate that US growth remains soft. The path of the USD remains driven by the Fed and the status of the trade negotiations with China. While there are many reasons to be bearish about USD, it still has the highest carry in G10. The Fed has cut rates this year and the USD recently hit a 20-year high. Global growth is now in the 10th lowest percentile over the last 20 years. This type of global backdrop tends to be dollar-supportive, not least because US investors typically maintain a strong home bias during global downturns.

Euro: Neutral. The resignation of Sabine Lautenschläger from the ECB may be a dovish signal, suggesting eurozone rates will stay lower for longer more accommodation may come should the growth outlook soften further, which seems possible given the continued weak data. On the other hand, a softening risk outlook is EUR-positive as EUR-funded carry trades unwind. In addition, lower risks of a no-deal Brexit, greater government stability in Italy, and news of policy stimulus in China might support the euro on the margin. For the EUR/USD currency pair, that means we are negative. Specifically, fundamentals for this currency pair are positive, valuations and technicals are negative, and sentiment is neutral.

JPY: Positive. The yen remains one of the only cheap recessionary hedges left in the global macro space. The yen is significantly undervalued from a structural perspective. As the extent of monetary policy divergence between Japan and the rest of the world narrows, the JPY is likely to become less undervalued. Ongoing trade disputes are still a source of significant downside risk to global growth. The fact that the Bank of Japan has relatively limited ammunition to ease policy (while other G10 central banks are likely to cut rates further) should provide support to the JPY. Our overall opinion of the USD/JPY currency pair is negative this month. Specifically, fundamentals, technicals and sentiment are negative, while valuations are modestly positive.

GBP: Negative. Yet again the outlook for sterling remains dominated by the nature of the UK's departure from the European Union. Brexit negotiations will be extended past 31 October, interrupted by a general election in December. We would expect the economy to continue to stagnate, the Bank of England to cut interest rates, and the currency to suffer from the weight of uncertainty. If the positive tone on Brexit acquires more substance, we would move our opinion of sterling to neutral. The market has a large short, suggesting further upside potential for GBP. For the GBP/USD currency pair, we are neutral. Breaking it down further, fundamentals and valuations are positive, sentiment is negative, and technicals are neutral.


We have changed our neutral allocation towards equities to an overweight this month. Within the asset class, we have an overweight in US and emerging-markets equities. Below some thoughts about each regional equity class.

US: Neutral. Fundamentals are positive. Reflationary deficit spending has supported nominal growth. However, trade tensions create a potential downside risk to the economy. Valuations are positive. Absolute metrics are on balance a touch cheaper than they were last month. Relative-value metrics look more favorable for equities versus Treasuries. Trade remains a wildcard on where valuation could head. Sentiment is negative. Technicals are positive. Weekly stochastics are slightly overbought. Pricing is maintaining its lead versus moving averages.

Europe ex-UK: Neutral. Fundamentals are negative, and have worsened since last month. The macro data continues to be weak, and companies will likely lower their guidance even further. 10% EPS growth for 2020 would seem too high in this context. The negative momentum of earnings growth persists. The ECB effect is fading — where can the support to equities come from? Valuations are neutral. So is sentiment. The Citi Surprise Index is back to deep negative territory, European equities suffer from continued outflows, and hedge-fund exposure is very low. Technicals are positive.

UK: Negative. Fundamentals are neutral. The domestic economy looks challenged. The labor market is at full employment, consumers are stretched, consumer credit is being tightened, and the housing market is weakening. Moves in sterling will be the key driver for earnings in the near term. Valuations remain attractive, particularly from a dividend yield perspective. Sentiment is negative. Short-term technicals are broadly neutral: The market is trading at both its 50 dmav and 200 dmav, with the 50dmav falling.

Japan: Neutral. Fundamentals are negative. Japan is a low-growth country with low inflation and a high dependence on external growth and trade. The aging of the population and Japan's high debt remain structural headwinds. The consumption tax has risen from 8% to 10%. Valuations are modestly positive. The market is up 7-8% since the last House View and earnings have not grown. Sentiment is modestly positive. Technicals are neutral.

Emerging markets: Positive. Fundamentals are positive and have even strengthened from last month. The EM PMI has increased to 51.0 from 50.4. Valuations are still negative. YTD earnings still suffer from downward pressure: TYD -12.% which is the worst year after 2015 so far. Expected earnings growth for 2019 is -9.4%. That said, two important sectors have turned around: IT and consumer discretionary earnings rebounded despite the trade woes. Sentiment is neutral and we have upgraded technicals this month to modestly positive.

China: Modestly positive. Fundamentals have improved from neutral to modestly positive, as the Chinese manufacturing PMI has risen slightly, underperforming EM ex-China economies. New Export Orders PMI has also strengthened. Valuations remain negative. China trades slightly below historical averages. The consumer discretionary sector (Alibaba accounts for 56% of the weighting) improved materially, while materials plunged (-9.5%). Technicals are positive. Higher highs and lower lowers provide a positive technical outlook.

Alternative Assets

REITs: Neutral. Fundamentals are neutral. Listed real estate markets are up +2.9% since the last House View (in line with forecast) versus -0.8% for global equity markets (above forecast). Stimulus is not expected for China's residential markets. The investment and financing markets are still supportive for REITs. Valuations are now neutral. The asset class is getting less cheap versus credits, but it is still firm versus equities on earnings. The dividend yield for real estate versus equities has worsened slightly, reflecting a premium for secure earnings from real estate versus equities. The dividend yield for real estate versus credits (a more stable sector). Sentiment has gone down to neutral. Real estate, which had been benefiting from a secure income play, is receiving more attention due to the difficult outlook for equities. However, growth is also slowing down modestly for REITs. Technicals are still positive, but less so than last month. The 200 DMA continues to be positive in all markets and for constituents (no change in momentum).

Distressed credit: Negative. Fundamentals remain negative. Risks to the downside (China tariffs, global trade, European slowdown, Brexit) are putting a burden on the backdrop of modest growth for 2019/2020. Default rates are below historical averages, but they are expected to rise in the next 12 months. CCC issuers face higher borrowing costs due to wider spreads. Valuations are neutral. After tightening 280 bps at the beginning of the year, spreads in CCCs widened 220 bps from May to mid-October. CCCs are materially underperforming high-yield debt on a total and excess-return basis. We expect CCC spreads to remain range-bound for the remainder of 2019. Sentiment is still negative. Technicals remain neutral.

Commodities – oil: Neutral. Fundamentals have flipped to negative from positive last month. The global growth expectations have been downgraded, which have led to downgrades in the forecast for oil demand. Concerning the supply/demand picture, the main theme is the high compliance with the decision by OPEC+ to extend production cuts of 1.2 mbd to the end of the first quarter 2020. US shale production growth has peaked and the rig count is drifting lower. Valuations are positive. The front end of the oil-futures curve has moved into backwardation, while the long end has moved into contango. The roll yield (1M vs 3M) is currently around +0% annualized. The yield is close to its historic average of -2%. This situation is slightly supportive for oil prices. Sentiment and technicals remain neutral.

About the House View

Aegon Asset Management operates from centers of expertise in North America, the UK, Continental Europe and Asia. The Aegon Asset Management House View is updated on a monthly basis, and is an excellent example of how we leverage our international expertise. First, we collate a global set of asset class views from our international teams. The asset class views are subsequently reviewed from macro, rates and asset allocation angles and an overarching committee then establishes the global House View. The outcome of this disciplined global process provides portfolio managers with latitude while at the same time ensuring that our products and solutions remain aligned.


The content of this document is for information purposes only and should not be considered as a commercial offer, business proposal or recommendation to perform investments in securities, funds or other products. All prices, market indications or financial data are for illustration purposes only. Although this information is composed with great care and although we always strive to ensure accuracy, completeness and correctness of the information, imperfections due to human errors may occur, as a result of which presented data and calculations may differ. Therefore, no rights may be derived from the provided data and calculations.

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