Investment Strategy: Muted optimism

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Over the last few weeks, world stock markets continued to be fuelled by strong risk appetite and inflows. However, more recently we have seen volatility rising as news on the coronavirus is turning worse. Markets can no longer ignore the impact of the virus on corporate earnings. Equity markets have taken a step back as investors were looking for safety in government bonds and gold. At the latest meeting of the ABN AMRO Investment Committee, no change was made to the asset allocation. There is a slight preference for stocks (modest overweight), while bonds remain out of favour (underweight).

The factors supporting ABN AMRO’s modestly positive market view include the accommodative monetary policies of central banks, the stabilisation of some economic indicators and the decrease in political uncertainty, exemplified by the trade deal between the US and China. There has also been a better-than-expected earnings season for US and European companies. Finally, the low bond yields, and in many cases negative bond yields, are also providing support for risky assets.

ABN AMRO expects that the global economy will remain slower for longer than had been previously thought. Economic growth forecasts were recently revised slightly downward, as a consequence of the coronavirus. It is our expectation that operations in China will resume in February and more or less will have returned back to normal in March. There is, however, a lot of uncertainty as the number of cases outside China is now also growing rapidly. Economic growth in the first quarter is expected to be very weak, but the following quarters will be stronger. Despite the recovery later in the year, the net effect on growth is expected to be slightly negative overall. This is because there is likely to be some discretionary spending that will not be recouped.

The Investment Committee actively took on more risk when it modestly increased the allocation to stocks earlier in February. At the same time, the position in riskier bonds, such as corporate bonds and emerging-markets debt, was also modestly increased, in large part in response to the negative yields found in other segments of the bond market. The recent developments around the coronavirus are watched closely, but for now they do not warrant a change in the investment strategy. A significant economic surprise or correction, either to the upside or to the downside, could lead to a reconsideration of the current asset allocation.

Mary Pieterse-Bloem
Acting Chair, ABN AMRO Investment Committee