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The gyrations of the equity market over the last 3 months have been quite remarkable: -11% from mid-September to mid-October and +13% from then on to now. What sort of message is this sequence of straight decline followed by a straight rally of basically the same magnitude? I guess it betrays utter confusion but also the faith that whatever happens central banks and their printing presses will always come to the rescue no matter what. Contrast this with the bond market. The German 10 year bond yield went from about 1.07% in mid-September to 0.85% in mid-October and to 0.68% in mid-December. A simple downward straight line trajectory betraying a simple message: deflation is around the corner and QE is on its way. No confusion and no uncertainty here.

Our overall macroeconomic scenario stays the same, given that recent datapoints continue to validate it: US GDP growth in a 2.5% to 3% corridor, very modest improvement in Europe (1%, helped by smaller fiscal headwind, FX and oil price tailwind), pain through monetary and fiscal adjustments in many emerging markets (most notably Brazil and Russia) and China gliding towards a much lower growth path. Two events could alter this scenario and force us to quickly re-adjust our portfolio. First, will the strength of the US economy force the Fed to raise rates next year? If it were to be the case, then an equity market correction trying to anticipate a monetary induced economic slowdown would be the most likely scenario. The second is a Eurozone crisis triggered by Greece. There, I have to steal the final lines in the latest commentary from the most entertaining market strategist in town, Albert Edwards. He quotes Beppe Grillo, the leader of the 5 Stelle party in Italy: "Eventually will come a time when a politician will hold up a copy of the EMU treaty, declare it null and void, and the debt null and void right along with it. That politician will be elected". The current Greek PM is gambling that he can manage to get the 180 votes required to elect as President his favoured candidate. Analyses show that he will probably miss the hurdle by about 10 votes, in which case the current parliament will have to be dissolved and new elections held in the first half of 2015. Syriza is leading the polls...

Lionel Rayon

Lionel joined Schroders as part of the acquisition of Cazenove Capital in the summer of 2013, having been at Cazenove since 2005. He is a senior member of the pan-European equity team and manager of the Schroder ISF* European Alpha Absolute Return (circa $1 Billion AuM). He is also responsible for developing and maintaining a fundamental and valuation screen of European stocks. The screen forms the basis for generating ideas for potential further detailed investigation by the European team within the framework of their disciplined Business Cycle Approach. Lionel joined from Citigroup where he was a Director in the European Tech Research Team. Prior to Citigroup, Lionel had been with Schroders Securities, as a French specialist, Nomura Research Institute, as a metals & mining specialist, Enskilda and Chevreux de Virieu. Lionel graduated from Indiana University (MBA) and Institut d'Etudes Politiques de Paris (BSc economics & finance). He has 20 years of equity research experience.

Website: www.schroders.com

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