Amundi considers its views on Italy and Spain in latest strategy outlook

Italy and Spain dominate the issues considered in Amundi’s latest Cross Asset Investment Strategy note.

Italy and Spain: a tale of two situations and two trajectories. Lack of discrimination and high correlations are a hallmark of financial crises: countries or sectors with different fundamentals are painted with the same brush. Once financial stress is on the wane, it becomes possible to assess “relative value”. On this point, the difference between Spain and Italy is one of the most striking: growth model, public debt trend, household debt, non-performing loans, real estate, credibility, solvency, political stability, competitiveness. None of this is really in Spain’s favour.

What do the fundamentals tell us about the “fair” hierarchy of bond yields in the eurozone? In order to evaluate the relative health of eurozone countries, we have established a ranking that takes current economic fundamentals and their dynamics into account. This has provided a great deal of information about likely future trends in interest rates.

Eurozone country allocation: a closer look at equity market valuations. We discuss the intra-eurozone valuation hierarchy, highlighting a revaluation potential in Spain and Italy which can only be exploited once earnings normalise. In the meantime, strategies overweighting Germany are likely to continue to be profitable.

The inevitable “japanisation” of European debt holdings? The percentage of the debt held by domestic financial institutions has become crucial. Such independence has some drawbacks, particularly when one looks at the absorption capacity of domestic investors. It depends on trends in public finance, the savings rate, growth, etc. Recent studies show that Japan is not far from reaching its limits in this respect. Full “japanisation” of European debt – if it occurs – does not provide much long-term reassurance about growth, savings, etc.

How do unconventional central banks’ policies impact activity and asset prices? With key rates close to zero, most central banks are currently implementing unconventional policies. The ultimate goal of this, is to restore monetary policy transmission mechanisms and ease credit conditions. However, for the moment, the impact seems to be limited to asset prices. Economic activity is barely reacting, or not reacting at all.

Flows: markets more reckless than investors. For three years, investors have favoured safety and yield over growth while the MSCI World index has nearly doubled compared with March 2009. The major announcements from central banks and the prospect of low interest rates in the long term may, however, lead them to reconsider their investments. A small inflow would be enough for shallower emerging markets to get back on track, as long as China can effectively take part in the global recovery.

Corporate “domestic” spreads: a new dimension of Eur IG credit valuations. The sovereign crisis increased the need for new credit valuation metrics besides usual average credit spreads vs. risk-free yields. In this section we present the results of an analysis of domestic corporate spreads for both financial and non-financial issuers, by curve buckets, covering two thirds of Eur IG credit market.

Forecasting European HY default rates: our tools, baseline forecasts and stressed scenarios. Last month we presented our baseline and stressed scenarios for US speculative grade default rates: this month we focused on European HY, showing how we get to two alternative models based on expected trends and stressed scenarios. As the task of forecasting default rates looks much more challenging for Euro speculative grade than for US HY, we also reported the step-by-step methodology we followed in this process.

Emerging assets and quantitative easing by the Fed: an empirical analysis. Ben Bernanke’s September 13 announcement of a third round of quantitative easing (QE) by the Federal Reserve was seen as good news for emerging assets. The previous large scale purchasing assets implemented by the Fed highlight that emerging assets denominated in local currencies are the most sensitive to these operations.

Emerging Markets represent a long term growth driver, but not for every MedTech segment. Unlike the Pharmaceutical industry for which the EM opportunity enables it to exit its patent cliff with growing prospects, not every segment in the MedTech industry will be able to capitalize on their expansion in the near term. Dialysis, Hospital Equipment & Services, Ophthalmics and In Vitro Diagnostics should benefit the most in the next 5 years, while the opportunity is more distant for Hearing Aids and Dental Implants.

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