Global Weekly: Wait and See

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ABN AMRO Private Banking, Expertise, Private Lending

US and European equity markets are recovering, but the mood is one of “wait and see.” Rising political risks are causing concern for bond markets in Europe’s periphery.

Volatility has retreated, and it appears that equity market sentiment is becoming more positive. The worst appears to be over. The first-quarter earnings season is just starting. Earnings expectations, after having been revised downward at the end of last year, are being met. While some companies have reported large losses, share prices have only been modestly affected. This is a confirmation that the market remains positive regarding equities.

The US economy appears to be at a standstill, and this week, a statement from the policymakers at the Federal Reserve suggested that the US economy may not be ready for a rate hike. While Fed policymakers believe that global risks may have diminished, inflation remains a concern. We think that the US central bank will keep rates on hold this year. Economic data released in the first quarter suggest that the US economy has weakened further.

Political risk is expected to increase in Europe over the next few months, given the Brexit referendum, continued financial discussions in Greece and inconclusive elections in Spain and Portugal. The Global Investment Committee validated the decision this week to reduce exposure to these risks by taking some profits in Spanish government bonds.

Asset allocation

At its meeting on 28 April, the Global Investment Committee left the overall asset allocation unchanged. It continues to reflect an overweight allocation to equities, a strong underweight in bonds and an overweight allocation to commodities. The portfolio allocation within the bond portion of the asset allocation was adjusted. Some profits will be taken in Spanish (periphery) government bonds and invested in quantitatively managed, less-risky government bonds. By taking profits now, the portfolio’s exposure to political risk is reduced, while introducing a wider base for diversification – both within the bond allocation and in the investment portfolio as a whole.

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