Investment Strategy November 2015

News item -

ABN AMRO Private Banking, Managing Board

At its meeting on 12 November, the Global Investment Committee reduced risk by moving the strong overweight in equities to a less pronounced overweight. In the balanced profile-3 portfolio, this amounted to a reduction in equities of 5%. The proceeds were invested in bonds, an asset class which remains strongly underweight.

The 5% reduction in equities (profile 3) was taken first from emerging markets equities excluding Asia. To come to 5%, reductions were also taken in US and European equities. The final regional positioning results in an overweight in Europe, underweight in US and a neutral allocation to emerging markets, with a preference for emerging-markets Asia.

Bond positions were increased equally in the corporate segments of investment-grade and high-yield.

Overweight in equities is maintained, but lessened

Despite a continuing favourable environment for equities, including low interest rates and moderate economic growth, some challenges are expected. In terms of earnings, moderate economic growth will translate into moderate earnings growth. While there has been price-earnings expansion over the last five or so years, the majority of the rerating has already taken place. With equities having returned to their near-term highs, the decision was made to reduce risk by trimming the equity allocation.

Bond allocation increased, but remains strongly underweight

The proceeds from the sale of equities in the balanced profiles (2-5) was added to the bond allocation, which remains strongly underweight. The decision was made to increase the current allocation to corporate investment-grade and high-yield bonds, two of the few remaining bond segments offering yields above cash. In the defensive profile-1 portfolio,the investment in corporate bonds was made from cash, given there is no equity position.

Corporate credits are favoured (in Europe, versus peripheral eurozone government bonds, for example) as they are believed to have more to gain from the ECB’s monetary policy easing, low financing rates and the unfolding economic recovery. Low energy prices and a strong US dollar versus the euro are additional positive factors for European corporate credits.

High-yield bond valuations are also now attractive, as spreads widened on earlier fears about the global recovery. We prefer Europe over the US, because of the large exposure to energy companies in the US high-yield universe.

The current bond allocation reflects the general unattractiveness of bond markets and liquidity concerns. There are no allocations to core European government bonds. The government bond allocation consists completely of eurozone periphery sovereigns.

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