As lockdowns around the world are cautiously lifted and vaccination campaigns gain pace, the global economy is recovering. Stock markets around the world have been buoyant, rising as the momentum of the recovery sparks optimism and investment.
At its latest meeting, the ABN AMRO Investment Committee decided not to increase or decrease its current positioning in equities and bonds. That said, the composition of client portfolios that are aligned with the ABN AMRO asset allocation has shifted as stock markets gained momentum and fixed income segments suffered over the past months. Due to market conditions, the share of equities in these portfolios has increased, while the fixed income position has diminished.
In accordance with internal policies, the Investment Committee considered the implications of the shift and chose to accept the changes. The stock and bond positions will not be “rebalanced” back to previously agreed tactical asset allocation levels. Instead, ABN AMRO is comfortable for the positions to remain aligned with market momentum. As a consequence, the phrase ‘modest overweight’ no longer reflects our allocation to equities. We are currently ‘overweight’ equities.
The Chinese economy has been out in front in terms of springing back to prepandemic levels. China’s recovery has been led by industry and the property sector. Now, consumption is also expected to broaden and strengthen. At the same time, Chinese policymakers are beginning to indicate that financial tightening may be underway, as credit growth and other metrics are closely watched.
In the US, economic growth has been better than expected, helped by strong consumption and liberal fiscal stimulus. As of March, retail sales are 17% above prepandemic levels and have fully erased the shortfall of the past year. The surprising speed of the recovery poses some key questions, however, such as, how much of the current consumption boom is making up for past weakness? And is some of today’s strength going to be offset by lower consumption in the future? There are also significant categories of consumption that remain depressed compared to before the pandemic, including air travel and domestic tourism. As more restrictions are eased, the recovery in these categories is likely to take over as the key driver of consumption growth.
Europe continues to lag in terms of economic growth, as lockdowns in many areas remain in place. The rollout of vaccines has also been an issue, although there has been a recent pickup as vaccine supply bottlenecks have eased. We expect that Europe will open up beginning at the end of the second quarter. The result will be that the global recovery becomes synchronised across all regions towards the end of the year.
Despite the risk of a correction in the short term, strong fundamentals continue to support equity markets and to justify a higher allocation to equities over the longer term. These fundamentals include low interest rates, accommodative central banks and significant amounts of stimulus for consumers and businesses, which, in turn, have a positive effect on company earnings.
While equities are, in general, no longer cheap, equity markets continue to attract inflows given that there are few alternatives for return-seeking investors. Moreover, in comparison to bonds, equities are less expensive than historically has been the case. And as long as earnings momentum is supporting valuations, then higher valuations are not too much of a concern.
In terms of positioning, we are largely neutral regarding equity regions (US, Europe and emerging markets), while continuing to prefer the financials, health care, industrials, materials and consumer discretionary sectors. The communication services, consumer staples and energy sectors remain out of favour. Our stance to all other sectors (information technology, utilities and real estate) is neutral.
Mary Pieterse-Bloem
Global Head Fixed Income and member of the ABN AMRO Investment Committee
