ABN AMRO sees first shoots of economic improvement

Press release -

Despite some small, early signs pointing to possible coming improvement in the global economy, ABN AMRO continues to prefer cash over stocks and bonds. ABN AMRO reckons risks and uncertainty still dominate, such as the ongoing US/China trade dispute and China’s economic slowdown. For that reason, equities and bonds are kept at underweight.

ABN AMRO expects the global slowdown to continue and is looking closely at whether the slump in manufacturing will seep into the stronger services sector – which would suggest a worsening of the economy sooner than currently anticipated. At the same time, there are more encouraging signs, such as European auto production bottoming out and stabilising. Markets were also buoyed up by the latest twists and turns in the trade dispute, such as the delay in the imposition of further tariffs on Chinese products. What’s more, consumer spending remains high in the US and Europe, interest rates are low, inflation subdued and employment robust. Despite positives, ABN AMRO will not change its current asset allocation, as it wants to see more evidence to justify any alterations.

Lack of alternatives

Richard de Groot, Chair of ABN AMRO’s Investment Committee, commented: “Stock markets are trading close to the upper band of their trading ranges. This is occurring even while fundamental factors, such as earnings growth, are weak. Financial conditions, however, have markedly improved since the beginning of the year, with central banks now having clearly signalled their support for the economy. Political risks, including Brexit and the trade war, if not solved are at least again tending toward a more favourable outcome than we saw a month ago. And investment sentiment for stocks is being positively influenced by the lack of alternatives for investors seeking return: bonds and savings rates are close to zero or negative. For now, we stand by our underweight position in stocks, and we continue to favour the US over Europe, given a stronger growth and earnings outlook.”

Bond rates low or negative

Slow growth and low inflation continue to impact bond markets. Overall, yields are low or negative. Cash, as a risk-free alternative, is therefore attractive. As an alternative to core government bond yields, ABN AMRO prefers government-related bonds, such as those of the European Investment Bank, and the government bonds of semi-core eurozone countries, including Spain, France and Ireland. Investment-grade corporate bonds are also preferred, as they will be supported by the European Central Bank’s asset purchasing programme, which is starting again in November.

Emerging market bonds preferred

High-yield bonds appear vulnerable to the slowing European economy, while leading indicators in emerging markets appear to be stabilising. ABN AMRO therefore prefers emerging-markets bonds over high yield. Given the range trading seen in bond markets, ABN AMRO suggests that bond investors take the opportunity to reduce the duration of the bond portfolio by switching to duration-hedged share classes in a portion of the corporate allocation. Duration could also be reduced by selling inflation-linked bonds.

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