Investment Outlook 03.2016
IMT Asset Management

Investment Outlook 03.2016



Since mid-February markets have calmed significantly and risky assets have enjoyed a clear rebound. Emerging markets equities rose about 16% and European equities about 14%. Also, high yields and emerging market bond spreads tightened considerably. In the period since mid-February German 10-year government bond yields remained almost unchanged, rising merely 2 basis points, while US 10-year treasury yields jumped by 20 basis points. The VIX index, a measure for the price of insurance against a fall in the S&P500 equity index, also declined by 14 points from 28 to 14. However, market sentiment remains fragile in our view. It is too early to proclaim a sustained bull market for the rest of the year. Macro risks remain elevated. Still, we remain confident that a recession can be avoided, and slow growth together with massive liquidity supply should prevent equity markets from falling off the cliff. We have to assume that heightened volatility will remain our companion.

Thomas Trauth

Economist, Dr. rer. pol., CFA, FRM

Is the worst over?

Financial markets

In February risky assets produced a V-shaped curve, selling off in the first half of the month and rebounding strongly thereafter. The rally of equity, credit, and commodity markets extended into March, when the rally was further fueled by dovish central banks and somewhat better US macro indicators.

But the S&P500 index was still down 0.4% in February, the EuroStoxx50 index 3.3%, and the Nikkei225 index even 8.5%. In general, emerging markets outperformed developed markets and ended February almost flat.
Safe-haven assets showed a contrary trend to the movement of risky assets. US and German government bond yields reversed course in mid-February and started to climb. The exception was Gold, which only temporarily sold-off, then resumed its rally and is currently trading around 1,250 USD/oz.

The risk-on environment and the recovery of oil and industrial metals prices boosted so-called commodity currencies like the Canadian Dollar (CAD), the Australian Dollar (AUD), and the Norwegian Krona (NOK). The Japanese Yen (JPY) also strengthened. The USD weakened across the board, not least because of a very dovish Fed.

Central banks

On 10 March and in line with market expectations, the ECB decided to cut rates further and to further increase its bond-buying program. However, the extent of the cut and some of the specific decisions taken clearly exceeded market expectations. For example, the decreases in the ECB’s main interest rates included a cut in the interest rate on deposits by 10 basis points to -0.40%. The monthly asset purchase program was increased to EUR 80 bn from EUR 60 bn and will now include investment-grade EUR-denominated bonds of non-bank corporations. Furthermore, the ECB introduced a new series of four targeted longer-term refinancing operations (TLTRO II), which are designed to encourage bank lending.

The US Fed also came out with very dovish statements, keeping rates unchanged. The Fed revised its forecast regarding the future path of its policy rates down to only two hikes in 2016. This is a clear sign that the Fed will stay accommodative for longer and that it regards downside risks to the economy as more severe than inflation risks.


Leading indicators in February were mixed. However, US data improved by and large. The ISM manufacturing index rose to 49.5 from 48.2. We would especially highlight the fact that the sub-index for new orders has been climbing for two months, which indicates that order books are becoming fuller. Non-farm payrolls rose by 220,000 and continue to signal that job creation remains robust. In February core inflation in the US picked up, which can be seen as a first sign that inflation is normalizing.

Meanwhile, the European PMI fell to 51.2 after 52.3. This is a clear deterioration, though a level above 50 indicates that Europe is still in the growth area.

China’s manufacturing PMI declined slightly to 48 from 48.2, while the Japanese PMI deteriorated significantly to 50.1 after 52.3


On the one hand the rebound in risky assets seems to confirm our view of last month that market moves have been exaggerated and suggested too high a recession risk. However, what is not clear to us, and remains the most important question for asset allocators right now, is whether the rebound of risky assets is rather technical – and thus will prove to be short-lived – or the beginning of a sustained positive market trend. Given that macro and political risks remain elevated, we certainly expect choppy and volatile markets for the remainder of the year and depressed returns overall. We remain cautiously optimistic that equity markets will deliver a positive return this year and we retain our neutral weighting of equity exposure in our portfolios. While the US market has outperformed other developed markets since the beginning of the year, we are keeping our underweight position in US stocks, since earnings are deteriorating in the US, the USD will remain strong, and there is a likelihood of further Fed rate hikes. We are carefully observing European growth indicators. While absolute levels of those indicators still point to robust growth, they have been deteriorating in recent months.

The recent improvement of market sentiment towards emerging markets is encouraging for us and we may consider increasing our exposure to emerging markets equity.

While the USD has weakened, the recent pick-up of US inflation may warrant a next Fed rate hike in the course of the year, potentially in June. This may lead to a re-strengthening of the USD later this year.

We remain skeptical that the oil price will move up much further, but we see current levels, around USD 40, as more sustainable than levels around USD 30 or even below. Supply overhang, however, remains structural and will continue to depress oil prices in our view.