Investment Strategy: Time to stay objective

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Markets continue to recover. Year-to-date, the S&P 500 Index has gained close to 12%. The Euro Stoxx 50 has risen by 8.6% and the MSCI China index has advanced by 11.4%. This rebound in stock markets is occurring against a backdrop of a slowing global economy and the expectation that sluggish growth will persist for a while longer.

At the latest meeting of the ABN AMRO Investment Committee, the decision was made to maintain the existing asset allocation. It consists of a neutral stance toward stocks, while some other risky assets, such as commodities and hedge funds, are favoured. In terms of regions, emerging markets are preferred for both fixed income and stock portfolios. Bonds remain out of favour.

Growth dip, but no recession

There are a number of conflicting signals affecting the investment environment, warranting an objective stance for now. While there is an obvious global economic slowdown underway, we believe it is largely owing to policymaker actions over 2017 and much of 2018.

China, for example, had a targeted tightening campaign, which led to tighter financial conditions in emerging markets. Demand, particularly in China, slowed. The weakness now seen in the eurozone, and Germany in particular, is a reflection of a dependence on exports and the global capital goods cycle, which have been hurt by China’s tightening measures.

In the US, tightening measures were the result of the Federal Reserve hiking interest rates and reducing its balance sheet, while in Europe, the European Central Bank (ECB) trimmed its asset purchases and other stimulus measures.

But now, some of these policies are being reversed. The Fed has signalled that interest rate hikes are over for the time being, and the ECB is not expected to raise rates until 2020. Chinese policymakers are also applying stimulus measures.

There is a lag, however, between monetary policy shifts (or reversals) and the effect being seen in markets. This explains why the current slowdown is expected to continue through the first half of 2019 and why global growth is expected to regain traction in the second half. China, however, is already showing signs of stabilising.

It is also good news that consumers in Europe and the US are still feeding domestic demand. Labour markets are also in good shape. There are no signs of consumer spending collapsing or of consumer confidence being dented. There are also some positive developments seen in global production and trade data, although overall they remain very weak.

On a company basis, the fourth quarter earnings season, which is still underway, has not been as bad as feared. Expectations, however, had been widely revised downward by analysts, in line with lower expected economic growth. The rebound in the stock market has helped restore investor sentiment and market volatility has declined.

In this environment, the Investment Committee chooses to remain neutral regarding stocks. While there are clearly headwinds, some of them are temporary, and no recession is expected. Other risks, such as those related to Brexit and the US/China trade dispute, while still present, are not expected to escalate.

Alternative assets for diversification

While a neutral stance is taken toward stocks, other risky assets, namely, commodities and hedge funds, remain in favour. Oil prices have recovered and are supported by optimism regarding trade and the impact of producer production cuts, as well as the US sanctions against Venezuela and Iran. Hedge fund investments continue to be of interest, given the diversification benefits that a combination of hedge fund strategies can contribute to a portfolio. Hedge fund strategies also offer the potential to maintain performance even when other asset classes face difficulties.

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