Dexia sees improvements by end 2013, positions allocation for H2

Koen Maes, head of Asset Allocation Strategy & Funds at Dexia Asset Management, says he sees signs in European purchasing manager indices (PMIs) of a bottoming out and improvement in the economic environment by the end of 2013.

The improvements are among a number of factors suggesting that equity markets will continue to provide upside potential, the manager added.

Another factors is the weaker outlook for commodities. This will not drag down equities markets, because, the manager said “the link between equity market change and commodity market change is a thing of the past.”

It foresees continued weak demand for key metals such as copper and nickel, especially with downward revisions to Chinese economic growth. But this wil not affect the global growth scenario held by the manager.

And, while markets have been hit by uncertainty sparked by a change to central bank policies, there is little chance of interest rates starting to rise too soon.

“The unemployment rate is still too high and inflation still relatively low,” said Nadège Dufosse, Asset Allocation strategist at Dexia AM.

Meanwhile, the Bank of Japan is still focused on expanding its balance sheet.

That said, Dexia AM does not see a great rotation out of fixed income into equities. the economic context is “too weak to trigger a real rotation,” Maes said. “That’s why we’re not yet expecting substantial rotation among the various asset classes.”

Lack of rotation means continued focus on stock picking, the manager added.

Further to that, it is apparent that companies have vastly improved balance sheets. This has illustrated a disconnect between the health of the global economy and the health of corporates – their global debt level is “substantially down”, while in the US operating margins are higher than they have ever been.

This points to equity market valuations being “far from excessive” with upside potential described as “huge” by the manager.

“The current price/earnings ratio is attractive, both in the US and in Europe. A back-to-normal economic climate and return to 2003-2007 valuation levels show the even higher upside potential available to the equity markets. And, lest we forget, the expected dividend yield from the equity markets is still a lot higher than the interest yielded on corporate bonds.”

On the basis of the evidence, Dexia AM remains positive on equities, and overweight in the eurozone and Japan. It remains positive on emerging debt and high yield.

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