The Letter - Bordier & Cie

More documents

Recommendations

Info

Preamble: Economic scenario • • • Growth Rates Currencies Hedging against future infl ation 1. Introduction: anticipation is vital 2. Gold 3. Commodities 4. Property 5. Equities 6. Focus on infl ation and growth 7. Infl ation-linked government bonds 8. Conclusion: it will soon be time to buy infl ation-linked bonds
Economic scenario Growth In the United States, the ISM manufacturing and services indexes have become slightly more encouraging, as are most of the Fed’s regional surveys. The weakness of housing investment is beginning to spread to other sectors. Consumers will have to contend with two problems: fi rstly, the steep rise in unemployment and an inadequate savings rate; secondly, the house price bubble which gave homeowners the impression of being rich has burst, to judge by the stocks of houses for sale with no buyers forthcoming. Recession in 2009: -2.5 to -2.9%. In the euro zone, the EU Commission’s global index of economic sentiment and the IFO index of German industrial confi - dence remain at very low levels. There is no longer any growth driver. Household morale is too low to expect any signifi cant rebound of consumer spending. The recession is likely to reach -2.4 to -2.8% in 2009 if the euro remains stable. In Japan, core CPI suggests incipient defl ation and the GDP defl ator remains in negative territory; Japan is at risk of another period of defl ation. The future is still looking bleak with a confi rmed downturn of exports to all the Asian countries and the United States, while consumer spending is not getting off the ground as yet. Capital spending by corporations is collapsing. The recession will be in the order of -5.4 to -5.8% in 2009. Rates In the United States, the Fed funds target rate was cut by 500 basis points between September 2007 and 16 December last. The Fed is fi ghting hard against recession; the collapse of the oil price is also generating rapid disinfl ation and some observers are already predicting defl ation. The Fed has put in place a programme to buy up treasury bonds on the secondary market in order to hold yields down to a fairly low level. In Europe, the ECB was obliged to act in the light of the onset of recession and the fi nancial crisis by cutting its base rate to 1% on 7 May last. The ECB has also decided to buy up securitized bonds of the “Pfandbrief” (mortgage bond) type in a programme 2 which may involve expenditure of as much as EUR 60 billion. Ten- year bond yields may rise to 4% before the year is out. In Japan, the BoJ has to all intents and purposes reverted to its zero interest rate policy by cutting its base rate to 0.1% on 19 December last. Ten-year JGB yields may rise to 1.8% in 2009. Currencies The USD index gained 21% between March 2008 and March 2009. The main factors cited to explain this strong upturn are: a sharp recovery of the trade balance, reversal of the commodity price trend, together with the determination shown by the Fed and Treasury to rescue some fi nancial institutions, foremost among them Bear Stearns, Fannie Mae and Freddie Mac. The rise of the dollar seems to have run out of steam. Investors are now focussing again on the double defi cit (balance of payments on current account with a defi cit equivalent to as much as 5% of GDP, galloping deterioration of the budget balance running at 12.9% of GDP for the 2008/2009 fi nancial year). Even if the ECB’s base rates remain above those of the Fed and the recession in the euro zone is likely to be very much in line with that of the United States this year, we still believe that the euro hit a lasting high at USD 1.55 to 1.59 in March 2008. This year’s trading range will be 1.25 to 1.35. For the past two years, the yen has been a victim of excessively low short-term rates which encouraged carry trade transactions (borrowing in yen to invest elsewhere) by foreign investors. This practice disappeared with the onset of the subprime loans fi nancial crisis which generated risk aversion. The yen has therefore gained fresh vigour, rising from 110 to 96 per USD since early August 2008. We now expect a trading range of 95 to 105 for the rest of the year. The GBP bottomed out last January. The SNB is determined to maintain a parity of CHF 1.50 to 1 euro. 3
Page 1: The Letter ______________________ N
Page 5 and 6: 200 150 100 INDEXED INFLATION IN TH
Page 7 and 8: 4. Property INDEX-LINKED INFLATION
Page 9 and 10: 6. Focus on infl ation and growth 6
Page 11 and 12: 6.5 Period 2004-2006 112 110 108 10
Page 13 and 14: ectly. Unlike real property for ins
Page 15: Head Offi ce Bordier & Cie Rue de H

The Letter - Bordier & Cie

Create successful ePaper yourself

Delete template?

Save as template?