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  Asset Allocation Update

Although the momentum in global growth has slowed somewhat, we think it’s still too soon to be bearish as leading indicators remain close to cyclical highs. However as the cycle matures, volatility is likely to stay elevated compared to the low levels we have been used to over the past two years.

The tech sector lost its sway after the data leaks at Facebook raised fundamental questions about the way big tech companies handle their customers’ data and privacy. Calls for stricter regulations of internet companies soon followed, which potentially puts pressure on the business model of companies such as Google, Facebook and Amazon. With valuations already at very high levels, the tech rally appears to be on hold for now.

Headlines focused on the risk of a slowdown in global trade after President Trump set his sights on China with a slew of import tariffs. Tensions between the US and China escalated quickly, but the current size of import restrictions will have a negligible effect on the economy of either country. In the background we saw some leading economic indicators coming off their recent highs. Although the direction of economic indicators is an important factor for markets in the short term, the elevated levels at which they currently are suggest that there is no reason at this point to worry about a real economic slowdown.

“In our view, it’s too early to call the end of the economic cycle. ”

In our view, it’s too early to call the end of the economic cycle. Global leading indicators have come down from recent highs but the level keeps pointing towards solid economic growth. Business and consumer confidence in the US remains very high; companies are raising their guidance and have increased investment plans. Tax benefits will now start to benefit businesses and the repatriation of cash can fuel shareholder payouts and corporate takeovers. The European economy lost some momentum but growth should stay above trend. PMIs came down and growth in business investment in the eurozone was somewhat lower, likely because of the stronger euro. Despite the stronger currency, export volumes have actually held up. The European labour market is still loose and does not suggest constraints to growth over the coming period. As global activity remains strong, we do see the risk of inflation rising and inflation indicators are slowly trending higher. Central banks will be quite aggressive in slowing the growth or decreasing the size of their inflated balance sheets. In this environment, we expect rates to move gradually higher. Our outlook for equity markets remains constructive, but there is more risk of higher inflation and slowing growth. Going forward, markets are likely to be more volatile. We are less constructive on credits, as companies exhibit less restraint on their balance sheets later in the cycle and increase leverage.

Higher interest rates and more leverage combined with less support from an upward trend in global growth means there will be more pressure on companies to deliver solid earnings. Expectations for earnings growth are elevated, but given the high level of economic activity, we are confident that they will be met. Earnings for the first quarter will be reported over the coming period, if these deliver a surprise to the upside, it will be a trigger for the market to regain its upward momentum.

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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