Press on, but watch your step Outlook... · Source: OECD projections, IMF, Lyxor International AM...

2017: Press on, but watch your stepJanuary 2017

Press on, but watch your step2017 outlook from Lyxor ETF

This document is for the exclusive use of investors acting on their own account and categorised either as “eligible counterparties” or “professional clients” within the meaning of markets in financial instruments directive 2004/39/ce

3

Ride the political wave (Apr/May)Brexit and a wave of European elections

are imminent

Tackle the Trump effect on EMs (Jul)

Protectionism, dollar strength and faster fed hikes await, but all is

not lost

2017: Press on, but watch your step

Global growth could be on the up as governments spend their way to further recovery. Expect equities to outdo bonds, but choose your targets wisely.

Markets are likely to be tactical, movements short lived and sentiment often surprising. You knew there had to be a flipside to the coin right? So many known unknowns mean you may need a strategy a little more refined than a headlong rush into longs.

Move forward with the fiscal push, but watch your step. Safe havens are few, so take precautions. Use hedges, limit your sensitivity to market moves and wear shorts wisely.


Interpreting the events of 2016 isn’t easy. Join the dots and you end up with a Rorschach Test. Looking forward might be simpler.

How the key events might pan out

Other things we are watching out for Key questions abound: Can Trump deliver his policy agenda? How “hard” will Brexit actually be? Can Europe’s leaders push back the wave of populism? Will active managers stage a comeback? Growth may be on the up, but it’s likely to be a bumpy ride.

For more on what 2017 has in store, and more on the events that made 2016 a year of firsts for ETFs, visit www.lyxoretf.co.uk.

What’s next?

Prepare for the fiscal push (Jan/Feb)

Synchronised, and supersized, fiscal

expansion could be on the way

Don’t bank on (all) bonds (Feb/Mar)2017 could be the year the government bond bubble

finally bursts

Go further for yield (Jun)

So many potential game-changers could complicate the hunt

for yield

More key central bank meetings

Policy still has a vital role to play, keep an eye on taper talks in Europe

Further rate hikes Watch out for hikes at the September & December

meetings

Leadership transition in China Expect further stimulus

spending to pave the way for new leadership

Yet more crucial elections in Europe All eyes turn to Germany

in the autumn

5

Prepare for the fiscal push Ideas to consider

The unlikely new leader of the free world won’t hold back if his campaign promises of massive infrastructure spending, corporate tax cuts and financial deregulation are anything to go by. Should he get his way in Congress – still a big if, despite the Republican Party’s majorities – it could extend an already unusually long expansionary cycle into 2019. Whatever happens, his first 100 days will be fascinating.

Elsewhere, China started sooner, and is likely to spend more. Old habits die hard; and painful long-term reform is on the backburner for now. Expect another push in October ahead of the leadership transition. Europe could arrive fashionably late. Rather like New Year’s Eve, Australia has already kicked off.

A great reflation could be under way. A great rotation from bonds into equities already is. Fiscal expansion favours

equities over bonds, always has. Questions include how much upside is left, where to look for the next layer of opportunity and whether apprentice policymakers can keep their promises. The market is priced for perfection, but great expectations are often dashed.

In the US, valuations are already rich. Dig deeper for domestic opportunities in certain sectors (including financials, IT and healthcare) or factors, like Value. European stocks have room to grow now ECB support is assured. Further afield, select commodity producers and emerging markets could benefit as infrastructure spending picks up and oil and metals prices stabilise.

Global growth forecasts:Growth in the abscenceof stimulus

Adding fiscal stimuluscontribution from:

ChinaUSEuro Area

2.9%

3.3%3.6%

2018201720160%

1%

2%

3%

4%

5%

FISCALPUSH

FISCALPUSH

FISCALPUSH

Nostimulus

2.6%

Nostimulus

2.9%

Nostimulus

2.9%

Could global growth surprise to the upside next year? Forecasters certainly seem to think so. Synchronised, and supersized, fiscal expansion could hold the key.

Rotate to equities, fight inflation


Prepare for the Fiscal Push

Equity sectors

Smart Beta

Asian equities

European equities

North American equities

Inflation- linked bonds

Source: OECD projections, IMF, Lyxor International AM Data as at December 2016. Past performance is not a reliable indicator of future results.

World real GDP growth forecasts

March

►20 Trump’s inauguration

►20 BOJ Monetary policy and outlook

►22 & 29 Socialist French primaries

►TBD Supreme Court’s Brexit decision

►02 BoE MPC meeting and inflation report

►08 UK Budget

►09 ECB and staff forecasts

►09-10 EU Heads of state (Brexit?)

►15 Dutch Elections

►15 FOMC meeting and press conference

►21-23 G20/IMF/WB meetings

►23 French presidential election (first round)

►30 Trump’s 100th day in office

►07 French presidential election (run-off)


►26-27 G7 Summit


►11 & 18 French Parliamentary elections


►22 & 23 EU Head of State

►07-08 G20 Summit ►03 BoE MPC meeting and Inflation report



►TBD Catalunya referendum

►TBD German Parliamentary election

►13-15 IMF Annual Meetings

►19-20 EU Heads of State


►TBC China’s 19th National Congress (leadership transition)




►TBD China’s Central Economic Work Meeting

July August September October DecemberMay JuneJanuary February April November

7

Don’t bank on (all) bonds

The key factor will be developed world governments and their switch to fiscal, rather than monetary, policy to try to kick-start the next stage of their recoveries. Deflation and secular stagnation are distant threats, massive infrastructure spending and tax cuts are on the way. Full employment and mounting wage pressure will fuel the great reflation in the US.

Faster Fed hikes, Brexit and ECB progress towards the QE exit door will gatecrash the government bond party. High valuations mean investment-grade credit may also be asked to step outside.

The correlation between US, Euro and global credit indices is high and likely to remain so for some time. Spreads will widen as yields rise. Shelter could be hard to find in the first half of the year. Keep your powder dry.

Hedging with linkers, breakevens and floating rate notes could help you hold firm as the fiscal dynamics kick in, the impacts of higher energy prices are felt and rates start rising. Look to short-dated bonds to reduce your rate sensitivity. Use shorts to protect against, or exploit, losses.

Bondholders are staring down the barrel. There, we said it. We’ve kept quiet for years as people said “they can’t get any higher, surely?”, and called the bond market’s demise only to see yields get even lower. This time though, we’re sticking our neck out. Too many factors collide in 2017 for it to be anything other than the year the government bond bubble finally bursts. It could get messy.


0

10

20

30

40

50

Tri

llio

n D

olla

rs

Global Bond IndexMarket Value

+USD44tnin 26 years

-USD3.9tnin 100 days

(-8% since peak)

Biggest drop sincethe data was madeavailable in 1990

1990 1995 2000 2005 2010 2015

Commodities

Financial stocks

Short bonds

Short duration bonds

Inflation- linked bonds

Don’t bank on (all) bonds

Ideas to consider

React to rising rates

Source: Bloomberg, Lyxor International AM. Data at 3 January 2017. Past performance is not a reliable indicator of future results.

Market value of the global bond market since 1990






►08 UK Budget










►26-27 G7 Summit



► 14 FOMC meeting and press conference















July OctoberJanuary April August September November DecemberFebruary March May June

9

The UK should trigger Brexit in March. How they get there, and how “hard” it will be is yet to be confirmed. The process won’t be straightforward and its impact is almost impossible to predict. There’s no room for complacency.

The people will have their say in Europe from 15 March onwards. Can its leaders withstand the rise of populism? The March vote in the Netherlands is an early primer for what might follow. The political climate could change dramatically, and with it the eurozone as we know it. Elections in France are the major flashpoint. Heads could roll.

Unexpected outcomes were all the rage in 2016. It would be a surprise if we didn’t see any more surprises. Triumph and disaster are equally possible, so prepare your portfolio to treat them both the same. Reduce your risk by pursuing a strategy that limits your sensitivity to market moves. Minimum Variance indices could help.

We wish currency forecasters and investors luck in 2017. Calling what will happen after Trump’s inauguration, Brexit and the wave of European elections isn’t easy to put it mildly. It could be better to take the risk out of the equation with currency hedged strategies.

Someone once wrote about the need to keep your head when all about you are losing theirs. As an investor, 2017 could test your mettle.


Ride the political wave

Dollar Index

What if Trump does notdeliver on growth promises?

2012 2013 2014 2015 2016 201775

80

85

90

95

100

105

Long and short European equities

Gold

Currency hedged

Smart Beta

Ride the political wave

Ideas to consider

Pick your investments wisely

Source: Bloomberg, Lyxor International AM. Data as of 4 January 2017. Past performance is not a reliable indicator of future results.

FX movements are increasingly hard to predict






►08 UK Budget










►26-27 G7 Summit


















July August October November DecemberJanuary February June SeptemberMarch April May

11

Go further for yield

A rebound in energy prices and a more robust US economy point to higher rates, fewer corporate defaults and an improving outlook for US high yield bonds. They’ve shown their resilience before. The ride could be bumpy, but patience could be rewarded later in the year.

The outlook is generally brighter for Europe than it was a year ago but it’s still fraught with uncertainty. Draghi and his doves should help carry investors over the electoral minefield. ECB support could keep high yield assets flying for now.

Rising US yields could drag EM sovereigns higher. Outflows could continue for a while yet. Improving fundamentals and better valuations should re-assert themselves, especially if

China surprises to the upside and reflation really kicks in. Look to hard currency debt and stay liquid.

Away from bonds, most companies are still growing or maintaining their dividends, rather than committing to large scale investment. We expect that to continue.

Dividend growers − companies capable of sustaining and growing their payouts over time − are more resilient than bond proxies when rates rise. Use Smart Beta funds to pinpoint the high quality companies most capable of keeping their dividend promises.

As the surprises stacked up in 2016, so too did demand for higher-yielding assets. So many potential game-changers could make this year’s hunt even harder.


US Corp High Yield

Global High Yield

EM USD Aggregate

Pan-Euro HY Euro U

US Corp

Peripheral Europe

US Treasury

Pan-European Aggregate

German Bund

10Y JGBs

6.1%

5.9%

5.1%

4.3%

3.4%

2.9%

1.9%

0.7%

0.3%

0.1%

High yield bonds

Corporate bonds

Dividend strategies

Smart Beta

Hard currency EMD

Go further for yield

Ideas to consider

Take the next step

Source: Bloomberg, Lyxor International AM. Data as of 4 January 2017. Past performance is not a reliable indicator of future results.

Global yields

SeptemberMarch






►08 UK Budget










►26-27 G7 Summit


















July August October NovemberJanuary February April May DecemberJune

13

Tackle the Trump effect on EMs

Yet the post-Trump tantrum may have been a little overdone, especially at the country level. A US-led reflation could prove positive for many EM assets, especially if deals limiting oil supply hold and metals prices climb as infrastructure spending ramps up. Oil prices can only travel so far however - US producers could fill the gap left by OPEC cuts.

Longer-term, the opportunity for further EM expansion is still great, as economies urbanise and modernise, while economic and political reforms come to fruition.

Be selective. Look to the countries leading the reform charge. Parts of Asia, like India and the ASEAN bloc and, to a lesser degree, Latin America could be well placed. Their eventual success will depend on the efficient implementation of reform. Investors have been quick to penalise those whose progress has stalled.

The short-term outlook has been clouded by recent events. Latin America’s prospects in particular would look very different from behind a wall. Geopolitical risk is never far from the surface. Havens could include countries less reliant on the US for funding or trade, but still well exposed to the current commodity rally, like parts of Eastern Europe.

Having been a surprise haven for return seekers for much of the year, Trump’s victory forced EMs to confront possible protectionism, dollar strength and faster fed hikes. Temporary troubles await.


20%

30%

40%

50%

60%

70%

80%

90%

100%

GDP per capita, USD, 2016

Urb

an p

op

ulat

ion,

% o

f to

tal,

2015

0 10,000 20,000 30,000 40,000 50,000 60,000

Brazil

Russia

China

Korea

Germany

Switch focus to the quality of the infrastructure

Urbanisation

United States

India

2030

2025

2025

?

Single country equities

Broad EM indices

Regional equities

Smart Beta

Tackle the Trump effect on EMs

Ideas to consider

Be selective

Source: World Bank, IMF, Lyxor International AM. Data as of December 2016. Past performance is not a reliable indicator of future results.

Urbanisation first, productivity is next

SeptemberMarch






►08 UK Budget










►26-27 G7 Summit


















July August OctoberFebruary April May November DecemberJanuary June

15

Knowing your risk It is important for potential investors to evaluate the risks described below and in the fund prospectus on our website www.lyxoretf.com

Capital at risk ETFs are tracking instruments: Their risk profile is similar to a direct investment in the Underlying index. Investors’ capital is fully at risk and investors may not get back the amount originally invested

Replication riskThe fund objectives might not be reached due to unexpected events on the underlying markets which will impact the index calculation and the efficient fund replication.

Counterparty riskinvestors are exposed to risks resulting from the use of an OTC swap with Société Générale. In-line with UCITs guidelines, the exposure to Société Générale cannot exceed 10% of the total fund assets. Physically replicated ETFs may have counterparty risk resulting from the use of a securities lending programme.

Concentration RiskSmart Beta ETFs select stocks or bonds for their portfolio from the original benchmark index. Where selection rules are extensive it can lead to a more concentrated portfolio where risk is spread over fewer stocks than the original benchmark.

Underlying riskThe Underlying index of a Lyxor ETF may be complex and volatile. When investing in commodities, the Underlying index is calculated with reference to commodity futures contracts exposing the investor to a liquidity risk linked to costs such as cost of carry and transportation. ETFs exposed to Emerging Markets carry a greater risk of potential loss than investment in Developed Markets as they are exposed to a wide range of unpredictable Emerging Market risks.

Currency riskETFs may be exposed to currency risk if the ETF is denominated in a currency different to that of the Underlying index they are tracking. This means that exchange rate fluctuations could have a negative or positive effect on returns.

Liquidity risk Liquidity is provided by registered market-makers on the respective stock exchange where the ETF is listed, including Société Générale. On exchange, liquidity may be limited as a result of a suspension in the underlying market represented by the Underlying index tracked by the ETF; a failure in the systems of one of the relevant stock exchanges, or other market-maker systems; or an abnormal trading situation or event.

Important information This communication is exclusively directed and available to Institutional Investors as defined by the 2004/39/EC Directive on markets in financial instruments acting for their own account and categorised as eligible counterparties or professional clients. This communication is not directed at retail clients.

This document is issued in the UK by Lyxor Asset Management UK LLP, which is authorized and regulated by the Financial Conduct Authority in the UK under Registration Number 435658.

Some of the funds described in this brochure are investment companies with Variable Capital (SICAV) incorporated under Luxembourg Law, listed on the official list of Undertakings for Collective Investment, authorised under Part I of the Luxembourg Law of 17th December 2010 (the “2010 Law”) on Undertakings for Collective Investment in accordance with provisions of the Directive 2009/65/EC (the “2009 Directive”) and subject to the supervision of the Commission de Surveillance du Secteur Financier (CSSF).

These funds are sub-funds of either Multi Units Luxembourg or Lyxor Index Fund and have been approved by the CSSF.

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Société Générale and Lyxor AM recommend that investors read carefully the “risk factors” section of the product’s prospectus and Key Investor Information Document (KIID). The prospectus and the KIID are available in French on the website of the AMF (www.amf-france.org). The prospectus in English and the KIID in the relevant local language (for all the countries referred to, in this document as a country in which a public offer of the product is authorised) are available free of charge on lyxoretf.com or upon request to client-services-etf@ lyxor.com.

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Prior to investing in the product, investors should seek independent financial, tax, accounting and legal advice. It is each investor’s responsibility to ascertain that it is authorised to subscribe, or invest into this product.

This document together with the prospectus and/or more generally any information or documents with respect to or in connection with the Fund does not constitute an offer for sale or solicitation of an offer for sale in any jurisdiction (i) in which such offer or solicitation is not authorized, (ii) in which the person making such offer or solicitation is not qualified to do so, or (iii) to any person to whom it is unlawful to make such offer or solicitation. In addition, the shares are not registered under the U.S Securities Act of 1933 and may not be directly or indirectly offered or sold in the United States (including its territories or possessions) or to or for the benefit of a U.S Person (being a “United State Person” within the meaning of Regulation S under the Securities Act of 1933 of the United States, as amended, and/or any person not included in the definition of “Non-United States Person” within the meaning of Section 4.7 (a) (1) (iv) of the rules of the U.S. Commodity Futures Trading Commission.). No U.S federal or state securities commission has reviewed or approved this document and more generally any documents with respect to or in connection with the fund. Any representation to the contrary is a criminal offence.

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Authorizations: Lyxor International Asset Management (Lyxor AM) is a French management company authorized by the Autorité des marchés financiers and placed under the regulations of the UCITS (2009/65/EC) and AIFM (2011/61/EU) Directives.

Société Générale is a French credit institution (bank) authorised by the Autorité de contrôle prudentiel et de résolution (the French Prudential Control Authority.

Contact information +44 (0) 800 707 69 56 | [email protected] | www.lyxoretf.co.uk

Press on, but watch your step Outlook... · Source: OECD projections, IMF, Lyxor International AM...

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Transcript of Press on, but watch your step Outlook... · Source: OECD projections, IMF, Lyxor International AM...