Degroof Petercam AM asset allocation flash

Economic confidence indicators continue to point to a solid cyclical growth momentum across sectors and regions.

Besides, global trade is showing early signs of improvement. Following numerous false starts in recent years, the current recovery looks stronger, more broad-based and more sustainable. That said, the significant difference between (soft) confidence indicators and (hard) measures of economic activity is questioning this to some extent.
Base effects linked to commodity prices are fading. This means headline inflation is heading somewhat lower again. Underlying inflation is expected to gain strength as the cyclical recovery confirms, even though it remains modest and below target in most developed markets for the time being. This implies that monetary conditions will stay loose for now even though the Fed is eying a gradual tightening of monetary conditions. The structural economic outlook is still clouded against the back of demographic headwinds, slower productivity growth, the debt overhang, geopolitical concerns and the difficult economic rebalancing process in China.

Slight overweight

• LC Emerging Market Debt – Fundamentals remain supportive. However, as indicated over the past few months, we are seeing a bit of overcrowding in some parts of the markets, e.g. India, Indonesia, Russia. However, longer term factors are still in positive territory, including hard economic data forecasts, attractive valuations and positive flows into the EM Debt segments. EUR strength has been detrimental for euro-based investors but we think it is also a positive signal for risk assets.

Underweight

• Government bonds. We remain confident that the low rates are here to stay for longer also because further positive surprises for confidence indices will become much harder from current high levels. The euro strength witnessed over past three months can become a headwind for growth and European inflation readings. Euro break-up probabilities expressed through investor surveys are receding. This supports the EU periphery and further spread convergence is to be expected. We maintain our Underweight position: from a portfolio construction point of view, we do not want to “double up” on risk, bearing both equities and sovereign bonds risk in the Eurozone.
• Emerging market equities. Emerging Markets equity performed well on the back of a Chinese economy holding up better than expected, a weaker dollar and favourable global outlook (hence higher commodity prices). Earnings revisions have been upwards for the region. Emerging Markets equities’ valuations (12.6x forward earnings) are more appealing than in developed countries, but the China risk partly accounts for this. We are slightly underweight for Emerging Markets because the Chinese credit picture looks a lot like that of the US in 2008.

Neutral

• Developed market equities. Our position for Equity as an asset class was lowered to Neutral (from Slight Overweight). Markets have reacted to the positive economic surprises globally in the past months and to the third consecutive quarter of clearly positive earnings growth. Positive surprises will be more difficult to realize from this point onwards. Furthermore valuations are no longer cheap, especially in the US. The Trump administration has only been able to deliver uncertainty. Expectations for Trumponomics have been reduced considerably. Thus far, the market has ignored this.