The very beginning of the year 2016 left us behind with the bitter taste of a full-blown hangover. Despite the increased generosity of central banks, fear over global growth left the financial markets in turmoil. However, despite these fears, Candriam identified several investment ideas likely to generate solid performances for investors. Our first lead was related to rise in inflation expectations. In the euro zone, we have also identified undervalued assets that may provide opportunities. Finally, emerging markets are expected to continue recovering under the combined impact of the stabilising dollar and more stable commodity prices. On a whole, investors remain very cautious because of the EU referendum in the UK.
Preparing for the return of inflation
Despite the ultra-accommodative monetary policies adopted on both sides of the Atlantic, inflation prospects have continued to decline over the last months. In Europe, inflation breakevens are still close to their all-time lows, while inflation has finally returned in the US after years of deflation fears. Given the recovery in the manufacturing sector, the tension on the job market and floor-level oil prices, we may be at the dawn of a new period of rising inflation expectations. Against this backdrop, inflation-linked securities are good investment opportunities as well as more value-oriented investments.
The euro zone economy is currently benefiting from better financial conditions and a more accommodative fiscal policy than in recent years. However, despite this improvement in fundamentals, the region is still facing a number of political risks, which can explain the underperformance of equities. After underperforming the US equities market for months, valuations should offer an attractive entry point once the political risks have dissipated and investors refocus on fundamentals and take the ongoing European economic recovery into consideration. In the credit space, financials offer an attractive risk/reward profile, as do European High Yield bonds.
Emerging market recovery
After years of turbulence, emerging markets also look promising. Pressures have eased thanks to the stabilisation of the US dollar and commodity prices. Economic surprises and earnings revisions are both headed in the right direction. Against this backdrop, emerging equities are attractive with their valuations still at historic lows. Investment flows have turned positive during the first half, showing a renewed interest of investors after a capitulation period last year. Emerging debt is also attractive and should continue to offer an attractive return. At current levels, many emerging currencies are historically cheap, in the wake of the correction begun in May 2013 when the Fed first unveiled its gradual tapering programme.
Recent surveys reveal risk appetite stands below its average. That comes as no surprise as the EU referendum in the UK on 23 June appears as an obstacle for European markets to move ahead. It is our belief however that the UK will remain in the EU and that the removal of this uncertainty could unlock some further potential in European equities.