ABN AMRO: “Uncertainty about markets dictates neutral stance on equities”

Press release -

As the second half of 2019 approaches, ABN AMRO retains its neutral stance on equities. In its new Investment Outlook ‘Riding the Wave’, the bank explains that the equity markets are out of step with the current economic environment, creating a situation that is untenable in the long term. At the same time, however, ABN AMRO highlights that economic improvement and higher earnings growth could give the markets a fresh impulse during the months ahead. Given the uncertainty for the short term, the bank retains its neutral stance on equities.

Richard de Groot, Global Head at ABN AMRO’s Investment Centre, explains: “Investors expect the global economy to recover during the second half of 2019 and in 2020. And indeed there are signs that point to that recovery, predominantly in China. Still, uncertainties remain. Investors expect corporate earnings to grow at an accelerated pace. Analysts are even predicting that earnings of publicly traded companies in the US will grow by more than 10 percent in 2020. That figure seems somewhat optimistic to us, particularly given the uncertain economic outlook. Lastly, investors expect political and geopolitical risks to diminish, in particular for trade. So far, however, the US and China haven’t reached any trade deal, and the risk that the negotiations will fail entirely has increased a little. Overall, these factors justify our neutral stance on equities.”

Preference for US stocks

Within the equity market, ABN AMRO continues to have a preference for stocks from the US over the rest of the world. The bank recently even extended its overweight position in US equities. With continued low unemployment levels, ABN AMRO expects the US consumer to remain an important support to the economy. The US economy is also less dependent on international trade, in particular compared with Europe and emerging markets. US stocks are profiting from a stronger economy, higher earnings growth and American dominance in the IT and communication services sectors.

Neutral on emerging market equities

ABN AMRO recently downgraded its stance on emerging market equities from positive to neutral. The reason that the bank gives is the high degree of risk that a potential trade war carries for the economic outlook and corporate profit growth. ABN AMRO also remains negative on Europe as an equities region, by reason of the low economic growth, uninspiring corporate profits and comparatively high political uncertainties. At the sector level, the bank remains positive on IT and communication services (both overweight), while it is cautious about the sectors financials and consumer staples. With the demand for water growing worldwide, the bank also sees investment opportunities in companies that provide services or products for improving water infrastructure, access to water and water quality. Companies focusing on these products and services are expected to see rapid profit growth during the years ahead.

Opportunities for emerging market bonds

Emerging markets offer opportunities for bond investors, ABN AMRO continues. While the bank admits that emerging market debt (EMD) is not cheap, yields on the loans are attractive. ABN AMRO advises investors to consider investing in emerging market bonds that are listed in ‘hard’ currencies, for example the US dollar, with the foreign exchange risk hedged in euros. The bank also suggests that investors should focus on investment-grade corporate bonds (bonds issued by companies with healthy balance sheets). Besides investment-grade corporates, government bonds from the periphery of Europe should occupy the principal positions in an investor’s bond portfolio, ABN AMRO believes. For the portfolio as a whole, however, the bank remains cautious on bonds.

Positive on gold prices

ABN AMRO still retains its positive outlook on gold prices, expecting them to remain above the 200-day moving average of around 1255 dollars per ounce. The forecast for year-end 2019 is that gold will reach 1400 dollars per ounce. ABN AMRO expects oil prices to offer limited upward potential, and predicts that Brent oil will continue to fluctuate within a bandwidth of 60-80 dollars per barrel. The forecast for year-end is a price of 70 dollars per barrel.

“Dollar’s importance to diminish”

The bank believes that the dollar’s dominance will diminish somewhat during the years ahead. At present the dollar occupies an extremely large share of the foreign exchange (FX) markets, and turnovers in the US currency are exceptionally high. However, ABN AMRO believes that the dollar will start to play a less prominent role, if only slightly, in both FX reserves and trades. The bank explains this by highlighting ‘structural factors’ that could make the currency less attractive in the long term. To reduce their dependency on the dollar, central banks with the largest FX reserves (principally the Chinese central bank) are expected to adopt a more diversified composition of their FX reserves and so reduce their demand for dollars. For year-end 2019, ABN AMRO MeesPierson predicts a euro/dollar exchange rate of 1.16.

Read the complete Investment Outlook 'Riding the Wave' here.

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