ABN AMRO Private Banking takes profit on US equities & cyclical stocks, targets European equities, high dividends, buybacks & high quality bonds

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World economy

ABN AMRO Private Banking has moved to Underweight for US equities, reduced its exposure to cyclical stocks after recent strong performance and recommends further portfolio diversification to reduce risk, according to its Q1 2014 Investment Outlook – The Great Rebalancing – published today.

The private bank remains Overweight equities generally and has recently upgraded European equities to Overweight (from Neutral), on valuation grounds relative to other markets and against historical averages. High dividend stocks are again in focus, as are companies under pressure to increase shareholder value via share buybacks or corporate restructuring.

Although ABN AMRO forecasts global economic growth of 3.7% in 2014, it believes that central banks will wait to see firm evidence of broad based economic recovery before tightening monetary policy due to continuing concerns around deflation – recently demonstrated in the ECB rate cut.

Didier Duret, Chief Investment Officer at ABN AMRO Private Banking, said: “The global economy continues to gain strength and historically low interest rates are being prolonged by muted inflation. This results in a sweet spot for equities and quality bonds. Conditions support portfolio diversification to reduce risk, based on low market volatility and declining correlations between asset classes.”

Asset allocations in the private bank’s balanced model portfolio remains unaltered from the last quarter, with equities at 44%, bonds 37% and cash 9%. Hedge funds, property and commodities retain weightings of 5%, 3% and 2% respectively.

Alongside its downgrading of cyclical Industrials stocks, the private bank has upgraded Consumer Staples and Telecom to Neutral (from Underweight). It remains Overweight in Oil Services, Exploration & Production, Chemicals, Capital Goods, Automobiles & Components, Pharmaceuticals, Biotech & Life Sciences, Insurance, Software & Services and Semiconductors & Equipment.

The equity theme of the quarter is ‘Unlocking value’ and companies that are under pressure to increase shareholder value, either via share buybacks or corporate restructuring. These include Amgen, Apple, Dow Chemical, SBM Offshore, Gilead, Microsoft, NestlĂ© and Novartis.

The bank remains Underweight fixed income, but recommends high quality corporate credits. It believes Spanish and Irish sovereign bonds could be income drivers for portfolios in the year ahead. In currencies, the US dollar, British pound and Swedish krona are favoured, alongside the Chinese yuan, Korean won, Mexican peso, Chilean peso and Polish zloty. The bank maintains a bearish short term view on commodities, but recommends long/short equity and event-driven hedge funds.

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