The first signs of economic improvement MeesPierson sees, but still opts for cash

The first signs of economic improvement MeesPierson sees, but still opts for cash

Despite “the first, early signals” that the world economy situation may improve somewhat, ABN Amro MeesPierson continues to favor cash over equities and bonds. “Liquidity is attractive as a risk-free alternative.
ABN MeesPierson has been positive on cash for months. The private bank remains underweight in equities and bonds because there are still too many risks and uncertainties. Consider the continuing trade conflict between China and the United States and the slowdown in the growth of the Chinese economy.
MeesPierson expects the global slowdown to continue. The private bank of ABN Amro states that it is important to monitor whether the malaise in the production sector is spreading to the strong services sector. That would indicate that the state of the economy is deteriorating faster than is currently expected. So it is still worth paying attention.
Why the hopefulness?
At the same time there are also optimistic signals. An argument for this is the state of the European car industry. It seems to have reached the lowest point. A stabilization is found.
Another argument for hopefulness is the latest twists and turns in the trade conflict, such as the postponement of additional US taxes on Chinese products. These spins seem to have a positive impact on the markets.
Furthermore, it is argued that consumer spending in the US and Europe is still high and appears to be high, interest rates are low, inflation is limited and employment is strong.
Despite these positive signals, ABN MeesPierson is not currently changing asset allocation. A matter of looking at the cat from the tree. After all, the bank first wants more proof that an adjustment is justified.
Lack of alternatives
“Currently, stock markets are moving in the upper part of their trading ranges, while fundamental factors such as corporate earnings growth are weak.” That is the opinion of Richard de Groot, chairman of the ABN Amro Investment Committee.
“However, financial conditions have improved considerably since the beginning of this year, with central banks pursuing a policy that supports the economy. Political risks, such as Brexit and the trade conflict, have not been resolved. But they tend to have a more positive outcome compared to last month “
The interest on bonds and savings rates is zero or negative. “For the time being, we are holding on to our underweight in equities. Due to better earnings and growth prospects, we prefer US to European equities at regional level,” said De Groot.
Bond rate low or negative
The estimate is that slow growth and low inflation continue to affect the bond markets. “Generally, returns are low or negative. That makes liquidity attractive as a risk-free alternative,” the private bank believes.
As an alternative to leading government bonds, ABN Amro MeesPierson prefers government-related bonds, such as those from the European Investment Bank and government bonds from semi-core eurozone countries (including Spain, France and Ireland).
Investment grade corporate bonds are also preferred as they will be supported by the buy-back program of the European Central Bank (ECB). This will start again in November.
Preference for EMD over high yields
High-yield corporate bonds seem vulnerable to the slowing economic growth in Europe, according to MeesPierson. Meanwhile, leading indicators in emerging markets appear to be stabilizing.
That is why emerging market bonds, the so-called Emerging Market Debt (EMD), are preferable to high yields. The bond markets are also currently moving within bandwidths.
Finally, the private bank investment experts make a suggestion to bond investors to take the opportunity to shorten the duration of the portfolio.
This can be achieved by switching within a part of the corporate bond position to bond instruments whose duration risks are hedged (so-called ‘duration-hedged share classes’). The duration can also be reduced by selling inflation-related bonds.

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