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Climbing the wall of worries

26 March 2019

Markets climbed the proverbial wall of worry, but what’s next? The downside risk is still the slowing global economy, where we don’t see a turnaround yet. On the positive side, central banks have paused their monetary tightening for now and if monetary and fiscal stimulus in China feeds through and gives the economy a new boost, we get another lift. We have seen some -tentative- effects of that and as a result, the uptrend in equity markets is still strong. We find the current balance between upside surprises and downside risks to be tricky. Hence, we are happy to be roughly neutral on equity markets and favoring regions where policymakers have room to stimulate, notably the US and Emerging markets. We are not willing to fight the tape yet, but are ready to act when sentiment fades or the hoped-for recovery does not materialize.

Silver lining

The most recent batch of leading indicators were still pointing towards a slowdown in global growth.  Economists are still busy downgrading their growth estimates. Similarly, analysts are revising earnings estimates lower. Nowcasts in the US have GDP growth tracking at just 0.5%. In Europe the trend is the same, and at a lower level. The silver lining here is that central banks have paused tightening policy, so in this environment, interest rates are unlikely to pick up much. The bond market has quickly responded, but it may give rise to a search for yield across assets that can continue for some time. The ECB has delivered on a new set of TLTRO loans. Although this announcement came somewhat sooner than expected. It helps peripheral banks, but will hardly made a difference for markets as they were widely expected. New TLTROs are only replacing previous ones at somewhat less generous terms. Probably more important was that the ECB signaled to keep rates low for longer. That helps keep credit and equity markets supported for now. When easier monetary policy does feed through and supports the economy, valuations don’t look overly stretched. But as mentioned the evidence for that is still scarce, though it is enough to keep credit and equity markets supported for now. The move higher, however, has been violent and we should not be surprised if markets pause for a breath.  

“The most recent batch of leading indicators were still pointing towards a slowdown in global growth.”

China stimulus boost

A couple of weeks ago we commented on the parallel with the 2015/16 cycle. Now as well as then we saw growth slowing, credit spreads spiking and in the end central banks turning more dovish. The only thing missing in that comparison so far was stimulus from the Chinese government giving global growth a new boost. There are two reasons why we expect the same to happen again. First, that stimulus is much needed given the weakness we see in Asian exports. Second, that the stimulus is now forthcoming. Reserve requirements for banks have been cut aggressively, the interbank lending rate is 2% lower than a year ago and credit growth picked up. We are fully aware that Chinese data should always be taken with a pinch of salt, and around Chinese new year they become even a little more unreliable. Hence, it is not clear yet how effective stimulus really has been. Markets picked up on it at least and most cyclical assets outperformed. At a minimum, we can argue that it further supports sentiment for now. 

Lower for longer

Whereas equities march higher and spreads move lower, bond yields remain stuck at incredibly low levels. Many in Europe are drawing parallels to the Japanese experience. And there are of course striking and uncanny resemblances. It was twenty years ago that the Bank of Japan abolished interest rates. The ECB just downgraded its growth and inflation forecasts and delivered the message that rates will not rise this year. This is not an environment where bond yields in the core of Europe are likely to rise. Yes, they are ridiculously low. And no, that does not mean they will rise. Bad news for those in need of higher rates. Good news for the search for yield. However, with the strong rally in equity markets they have moved ahead of the fundamentals. Leading indicators are still pointing lower and have so far not shown any sign we will see a renewed pick-up in growth. As long as investors believe policymakers have responded in time to support growth the strong positive will keep lifting markets, and as long as momentum stays strong we are not willing to go against it.


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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