A growing threat for Europe
The threat of the cut in Russian gas supply to Europe is further darkening the outlook for the eurozone. After recently reducing risk by decreasing equity and bond positions, the ABN AMRO Investment Committee has decided to further reduce risk by trimming lower-quality corporate bonds.
The number of risks affecting global growth and financial markets in 2022 are by now well known to investors. Persistent high inflation, rising interest rates, slowing economic growth and the war in Ukraine have resulted in market declines and volatility around the world. On top of that, there is now the increased threat of Russia’s strategy to pressure Europe by severely restricting (or cutting-off) the continent’s supply of Russian gas.
The updated base-case scenario that underlies our investment strategy does not call for a full cut-off by Russia. But there is a significant risk that Russia is decreasing supplies more abruptly and faster than the gradual replacement of Russian gas that European governments have been pursuing. If this were to happen, it will certainly put more pressure, on particularly, the European economy.
Against this background, the decision was made to further lower high-yield bond exposure, with the proceeds added to cash. The ABN AMRO asset allocation continues to call for an underweight position in equities, the bond allocation is now further underweight and cash is overweight.
Addendum 14 July 2022: More defensive sector positioning
In the wake of further downward adjustments to our economic scenario and the complex outlook for the European energy situation, the ABN AMRO Investment Committee has made a further change in the sector positioning, in line with earlier moves. To reduce cyclicality and limit the potential fall-out from rising energy prices and lower gas supply, it was decided to decrease the materials sector to neutral and to increase the consumer staples sector to a modest overweight. On balance, we have thereby adopted a more defensive stance, which we feel fits the challenging outlook in the coming quarters.
Richard de Groot
Chair ABN AMRO Investment Committee