Investment Strategy - Time to Increase Equities

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ABN AMRO Private Banking, Managing Board

The fear of recession is overdone, the US Federal Reserve is expected to be “on hold” in terms of rate hikes in 2016 and central banks worldwide are expected to continue to support growth, having plenty of fiscal and monetary policy levers left to use. Against this background, the Global Investment Committee decided it was time to increase equity risk across the board at their meeting on 18 February.

The increase will be at the expense of cash in cash-rich portfolios (profiles 2, 3 and 4) and, in addition, at the expense of existing exposure to hedge funds in the equity-dominated portfolios (profiles 5 and 6).

The asset allocation now calls for an even stronger overweight in risky assets and equities in particular, with unchanged positions in bonds (underweight), commodities (overweight) and underweight allocations to real estate in balanced profiles. The allocation to hedge funds remains an overweight with the exception of the equity-dominated portfolios, which now have a neutral allocation.

The increase in equities was driven by rebalancing after downward market drift and an expectation for selected equity sectors to outperform broader markets. This increase is a continuation of the GIC’s previous recommendation, which called for clients who were significantly underweight in equity risk to selectively begin to add to equity holdings. The GIC’s recommendation of 18 February goes one step further, by advising all clients to selectively rebuild and increase risk and, in particular, rebuild equity positions.

For portfolio profile 3, the 5% increase in equity risk comprises an increase of 3% to return to the early December tactical asset allocation of 38%, from the current level of 35%, due to recent market drift, and an additional 2% increase in equity risk. As a result, the tactical equity allocation has increased to 40%. For more information on the composition of the six profile portfolios, see Figure 1.