Asset Allocation Update July 2017

CONTINUATION OF GROWTH IN THE UNITED STATES

Worse-than-expected economic data, low inflationary pressure and the absence of significant government stimuli and tax cuts do not give the Fed good reason to postpone interest rate hikes. In June, the Fed raised interest rates for the second time this year and it expects to implement a third increase in the second half of 2017. This is in line with our expectations. We expect growth to continue. For 2018, we anticipate a further two to three interest rate increases, more than the market expects. At the same time, the high number of purchased bonds will tentatively be reduced. Monetary tightening will cause upward pressure on bond yields, although this will be slight given the limited inflationary pressure. The economic outlook contains little room for extra earnings growth, but any tax cuts will pose an upward risk. 

MORE HINTS ABOUT CHANGES TO ECB POLICY

The Eurozone continues to publish positive economic data. Although we believe that the acceleration in growth is now behind us, the economy is likely to grow above trend for the next few quarters. Although inflation remains low, last month Mario Draghi stressed that in the view of the ECB this was chiefly due to temporary factors. Partly driven by these comments, market players are assuming that the ECB will gradually taper its sizeable package of stimuli as of 2018. Bond purchases will be reduced first, after which interest rate policy will be amended. Given the low wage increases and the stronger euro, however, the latter may not happen for a while. Although we still expect long-term interest rates to rise this year and next, this may occur less quickly than previously thought. The ECB seems to adopting a more cautious approach. The withdrawal of the ECB will also lead to greater differences in spreads between the risky and less risky sections of the credit market. A sharp widening is unlikely, however. A cocktail of sound growth forecasts, low wage growth, small-scale tightening of monetary policy and lower political risk will continue to support European equities.
 

“On balance, we expect the UK economy to grow very little over the next few quarters.”

BREXIT AFFECTING UK GROWTH

One year on from the Brexit referendum, negotiations between the European Union and the UK finally got under way last month. Brexit will create uncertainty at UK firms, which will probably have a negative impact on investment volume. At the same time, UK consumers are being adversely affected by high inflation caused by the depreciation of the Sterling. On balance, we expect the UK economy to grow very little over the next few quarters. The question remains as to whether the Bank of England will raise interest rates to curb inflation. The lower growth is likely to have a minor negative impact on UK firms. Large UK companies earn a large portion of their revenue outside the UK. Their profitability has improved thanks to the depreciation of the Sterling. 
JAPAN IS PROFITING FROM GLOBAL UPTURN IN GROWTH
Japan’s outlook for growth has improved thanks to the global upturn in growth and higher global trade volumes. In contrast to many other developed countries, monetary policy also remains extremely expansionary. Profitability is picking up at Japanese companies, making us optimistic about Japanese equities. 
GREEN SHOOTS IN EMERGING MARKETS
We are also more optimistic about Asia ex Japan and emerging markets. The Chinese slowdown in growth is continuing at a slower rate than expected, the Fed is tightening its monetary policy at a measured pace and commodity prices will gradually start to rise again. Moreover, export-oriented economies will continue to profit from the persisting upturn in growth and the corresponding higher global trade volume. The end of the monetary expansionary cycle is in sight in Asia ex Japan, but in Latin America central banks have greater capacity to implement monetary stimuli as a result of falling inflation. This would seem to be essential, because growth is lagging behind here compared to other regions. This does not alter the fact that many countries are in a better position to absorb negative shocks than they were a few years ago. All in all, we are therefore more positive about both bonds and equities. 
 

Disclaimer
Kempen Capital Management N.V. (KCM) is licensed as a manager of various investment funds and to provide investment services and is subject to supervision by the Netherlands Authority for the Financial Markets. This information may not be construed as an offer and provides insufficient basis for an investment decision.

Ruth van de Belt
Marius Bakker
Ivo Kuiper

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