Asset Allocation Update October 2017

Central bankers back in leading role

Last month, the European Central Bank indicated that it would provide greater clarity on the further tapering of the bond-buying programmes this month. We already know that these are to be scaled back as of 2018, the question remains by how much. The US central bank, the Fed, made it clear that in spite of limited inflationary pressure it still intends to raise interest rates again once this year and three times in 2018. We have assumed this to be the case for some time, but for the markets this was cause to price in an interest rate hike for 2017 and 2018. Finally, the UK’s central bank, the BoE, hinted at an impending increase in interest rates. This is much sooner than we, and the market, had expected.  Given the gradual move away from expansionary monetary policies, it is no surprise that bond yields increased. We anticipate further, gradual increases in yields.

Germans and Catalonians went to the polls

In Europe, the Germans held a general election last month. Based on the results, the most obvious option is what is known as the ‘Jamaica coalition’ between the CDU/CSU, the conservative-liberal FDP and the Greens, but there are huge ideological differences. Moreover, the coalition will not be a great proponent of further European integration. This is also one of the reasons behind the fall in value of the euro last month. An (illegal) independence referendum was also held in Catalonia last month. The outcome shows that the Catalans wish to break away from Spain, increasing tensions between the region and the Spanish government. This is not doing the Spanish stock exchange any good. However, we believe that the economic implications of political trends will be limited. For Europe we continue to expect stable, abovetrend growth with negligible inflationary pressure. This creates capacity for further earnings growth.

“We do expect stable growth, but the US has already reached a late stage in the economic cycle.”

End of US expansionary phase not yet in sight

There is little capacity for further earnings growth in the US. We do expect stable growth, but the US has already reached a late stage in the economic cycle. This implies, in our view, that (wage) inflation will probably increase and earnings growth will come under growing pressure. The cut to corporation tax, which forms the core of Trump’s new tax plan presented in September, poses an upward risk. This Trumpflation has again been partly priced in by the markets.

Early elections in Japan

Japanese Prime Minister Abe called early general elections last month. We believe that his party, the LDP, will win the elections. The margin is likely to be smaller than Prime Minister Abe was hoping for though. This will make no difference to the economy, however; it is likely to continue its growth. At the same time, inflation will remain relatively low, enabling the Japanese central bank to continue its extremely expansionary monetary policy. We therefore prefer Japanese equities to their US counterparts.

Less focus on stability in China

The 19th Communist Party Congress will be held in China this month. China has chiefly been aiming for economic stability in the run-up to this congress. Now measures can again be taken to curb credit expansion further and combat overcapacity and pollution, which will slow growth slightly. The economic outlook for the rest of Asia ex Japan remains positive. There continues to be capacity for earnings growth, and as a result we continue to prefer equities from this region to US equities. The same applies to emerging market equities. Countries in Latin America continue to profit from the positive outlook for commodity prices and persisting global growth. Furthermore, many central banks there have
succeeded in reducing inflation over the past few years, which creates capacity for monetary expansion. Emerging Europe continues to profit from the recovery in the Eurozone.

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.

The Asset Allocation  Desk

Marius Bakker
Ivo Kuiper
Joost van Leenders

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