Asset Allocation Update September 2017

No monetary news

At the end of August, central bankers held their annual get-together in Jackson Hole. This proved to be a non-event as far as the financial markets are concerned. The focus was on the long term; no hints were given as to the future direction of monetary policy. The European Central Bank’s September meeting also failed to offer any decisive pointers. The ECB board did discuss tapering the purchasing programmes, but no tangible decisions were forthcoming. We expect an announcement on this in October and assume that the purchasing programmes will be scaled back as of January 2018. Downside risks for inflation have increased as a result of the appreciation in the euro’s value, but Eurozone growth remains robust. The German general election later this month will not change this. Although the markets are currently pricing in less than one interest rate hike in the US (up to the end of 2018), we anticipate a further increase to interest rates in 2017 and two to three in 2018. The unexpected departure of Stanley Fischer, vice chair of the US central bank, has made it more likely that fewer interest rate hikes will be implemented. The markets had already priced in very few interest rate increases, however. We continue to expect more interest rate hikes than the markets and anticipate higher government bond yields.

Politicians will trigger movements on financial markets

Yet it is not just monetary policymakers who trigger movements on the financial markets but also politicians. In early September, President Trump and the Democrats reached agreement on temporarily raising the US debt ceiling, the legal borrowing limit for the federal government. This allows relief aid to be released for the states of Texas and Louisiana, which were hit hard by Hurricane Harvey. Yet the debt ceiling remains a source of contention. The Republicans will need to discuss it with Democrats again in December. If the debt ceiling is not raised, the US government will have to cuts its spending drastically. This will not only trigger an economic crisis, it will also increase the risk of default. This is the reason why yields on short-term government bonds that mature in October dropped sharply, but also why yields on short-term government bonds that mature in December increased.

“The geopolitical tensions on the Korean peninsula are likely to persist for the time being.”

Persisting tensions on Korean peninsula

The geopolitical tensions on the Korean peninsula are likely to persist for the time being. Now that North Korea has conducted a highly successful nuclear test, it is clear that it is too late to negotiate Pyongyang’s total nuclear disarmament. The world would do better to accept North Korea as a nuclear power. We do not believe that the situation will escalate. There is so much at stake both for North Korea and the rest of the world that it will not go beyond a political poker game. A sharp correction would be the right time to buy securities in our view, given the sound economic outlook and consolidation we have seen over the summer. Within equities we have a preference for emerging markets. We are also positive about Japan. Although Japanese equities are not cheap, all the economic signals are currently at green. Leading indicators are pointing to growth picking up and the low
inflation means that the Japanese central bank remains in expansionary mode, longer than any other central bank.

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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