ABN AMRO MeesPierson: “Equity has greater long-term potential”

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Private bank believes in stock market recovery

Despite its current underweight equity stance, for the long term ABN AMRO MeesPierson favours this asset class over others. In its semiannual Investment Outlook titled Look beyond the clouds, ABN AMRO MeesPierson expresses the belief that equity will outperform on a 12 to 18-month horizon as the effects of the lockdowns wear off and the global economy picks up. Moreover, the bank expects corporate earnings to be supported by low financing costs and the long-term impact of government stimulus. Meanwhile, inflation is likely to remain low, allowing central banks to continue their current accommodative policies aimed at boosting economic activity.

Ralph Wessels, Head of Investment Strategy at ABN AMRO MeesPierson explains. “The outlook for the financial markets is still clouded by uncertainty about how the world is going to emerge from the Covid-19 pandemic. A lot will depend on how quickly the economy reopens. That said, the coronavirus is also likely to have a more lasting impact (as discussed in our Investment Outlook in the chapter “Covid-19 as a an accelerator of change”). Some sectors will suffer, while others may actually benefit.”

Winners and losers

One of the winners identified by ABN AMRO MeesPierson is the IT sector. The bank foresees an acceleration of digitalisation, as work-from-home technology has proven itself and companies invest more in software services and facilities to work in the cloud. Another sector which may see more spending is healthcare. People are likely to want better protection against health threats like a pandemic, and therefore demand more investment in healthcare from their governments. This could be positive for companies active in this sector. Both IT and healthcare are sector overweights in ABN AMRO MeesPierson’s portfolios. On the other hand, the bank is not optimistic about utilities and financials and has underweighted both these sectors. Financials are exposed to second-round effects of the current crisis (such as an uptick in bankruptcies and bad loans as well as persistently low interest rates).

Globalisation under mounting pressure

ABN AMRO MeesPierson sees mounting pressure on globalisation as companies realise they may be too dependent on cross-border supply chains. The private bank expects companies to rethink their strategies and relocate key business processes closer to their home market. Another knock-on effect of the Covid-19 pandemic is soaring global debt due to governments seeking finance for their massive stimulous programmes. Most countries will be able to reduce their debt levels as soon as the economy starts growing again, but for some countries this may be a problem. At a regional level, ABN AMRO MeesPierson is maintaining a neutral stance in emerging markets. These economies are suffering from the collapse of global trade, and in some cases also on account of plummeting commodity prices. In the coming months, however, these same markets should benefit from the relatively weak US dollar. The bank continues to favour US equity, choosing an overweight stance, while showing less enthusiasm for European equity, which is kept underweight.

Credits looking attractive

ABN AMRO MeesPierson suggests investing in bonds that are supported by central banks’ bond purchasing prorammes and still provide modest but positive returns. Given the fact that many government bonds are likely to produce negative returns, the bonds that the bank is referring to in particular are euro-denominated investment grade corporate bonds (credits). For high-yield bonds and emerging market debt, however, the situation continues to be problematic. These asset classes could be interesting if economic recovery after the lockdowns is V-shaped – which is not very likely. The bank is confident, however, that in the longer term high-yield and EMD spreads will ease to below their current levels. In this scenario, EMD is to be preferred, but these bonds are only suitable for investors who can stomach their price volatility.

Cautious on commodities

ABN AMRO MeesPierson is cautious when it comes to investing in commodities. While commodity prices may recover as the economy picks up, supply is considerable at the moment. This is why, for the time being, oil prices have limited upside. Another commodity the bank is cautious about is gold. If risk appetite in financial markets falls again, the US dollar will appreciate and positions in gold will be unwound. ETF long positions in gold and gold futures are still huge. Following a sell-off, the private bank expects the gold price to recover. For year-end 2020, the gold price is projected to be USD 1,700 per ounce and the price of Brent oil USD 45 a barrel.

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