Asset Allocation Update December 2017
Inflation remains surprisingly low
On the back of sound economic data, multiple interest rate hikes in the US would only seem to be a matter of time. Leading indicators, such as manufacturing and consumer confidence, point to economic growth remaining strong for the time being. One theme occupying the financial markets is why inflation is still so low. While unemployment is coming down each month and the capacity utilisation rate is increasing, price rises continue to be very low. One consequence of this is that yields on 10-year bonds are not rising, making the yield curve very flat. Historically, an inverted yield curve has been a bad omen for the economy. However, we do not expect this to occur for the time being and continue to anticipate sound economic growth over the next year.
Turbulent financial markets in China
In the wake of a period of calm, all eyes are now fixed on China. As China has a high level of debt and the government has announced its intention to tackle this, the financial markets are experiencing a turbulent time. This is visible in e.g. higher interest rates in the bond market. For now we are not particularly concerned about this. Although the Chinese government does face a major challenge, we believe that deleveraging is manageable. The Chinese supervisory authorities have demonstrated over the past few years that they set to work with caution.
“The long-awaited US tax cuts have been approved. Although not all the details are clear yet, it looks as if some companies will profit greatly from these. ”
The long-awaited US tax cuts have been approved. Although not all the details are clear yet, it looks as if some companies will profit greatly from these. In the meantime, there have been plenty of political developments in Europe. In Germany, the FDP has walked away from negotiations to form a coalition. The expectation is that there will ultimately be a large coalition led by Merkel. One alternative would be fresh elections, which would probably take place in the spring of 2018. Italy’s electorate is also preparing to go to the polls again, in all likelihood in March. There is a lower risk of a disruptive election result due to the new electoral law that has been adopted. The new law is likely to ensure that no single block obtains an absolute majority. This could delay further reforms.
We expect the low interest rates and robust economic growth and corporate earnings to keep market valuations high in the near future. For the coming period we are therefore positive about equities, with a slight preference for Europe.
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.