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Asset Allocation Update November 2017

Another strong earnings season

The third-quarter earnings season is now largely over. Corporate results were again robust and the growth in earnings and widening of profit margins persist. In particular US companies managed to surprise the market positively. The number of companies that reported results higher than the consensus was (well) above the average, especially with respect to revenue growth. Earnings growth was 5% higher than expected at over 8%, while revenue was up by 6%. The Eurozone also saw strong growth in both earnings (+9%) and revenue (+5%). Expectations for earnings growth had already been high even before the earnings season kicked off. This was particularly true in the Eurozone, leading to a muted response from the market. Japanese equities were an exception here: after the third consecutive quarter of high earnings growth and growing earnings expectations for the next few months, the Japanese market displayed sharp price rises. Expected earnings growth for the next twelve months remains high around the world. Equity markets will continue to profit from the higher earnings and rising margins as long as companies continue to meet the high expectations. The risk is that the bar is raised ever higher and markets get too far ahead of expectations.

“In its meeting on 26 October, the European Central Bank announced that it would further scale back its bond-buying programme from 2018. ”

ECB/central banks

In its meeting on 26 October, the European Central Bank announced that it would further scale back its bond-buying programme from 2018. The monthly amounts purchased will be reduced from 60 billion to 30 billion euros and the programme will continue until the end of September next year. The ECB also said it would not abruptly halt buying bonds after September 2018 and that the proceeds will be reinvested. Bond markets responded positively to the news: yields fell sharply and spreads on government bonds and credits tightened substantially. The Bank of England has raised interest rates for the first time in ten years, by 25 basis points to 0.5%. The decision had already largely been priced in by the market, but the central bank’s cautious tone on any future interest rate increases caused yields on UK bonds to drop sharply and the British pound to weaken. Jerome Powell is to succeed Janet Yellen as president of the US central bank, the Fed. We expect this appointment to ensure policy continuity. Powell has been a governor at the Fed since 2012 and has always agreed with the expansionary monetary policy and gradual interest rate increases.


Growing political tensions between the Catalan government and the Spanish national government, triggered by the independence referendum on 1 October, initially led to wider spreads on Spanish bonds. However, Spanish Prime Minister Rajoy’s dissolution of the current Catalan government and decision to call fresh elections on 21 December of this year led to Spanish spreads recovering at the end of the month.

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.

The Asset Allocation Desk

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