Equity investors remained cautious in February as the outlook for monetary policy continued to influence markets, according to Van Lanschot Kempen senior investment strategist Joost van Leenders (pictured).
In its latest asset allocation outlook, the Netherlands-based asset manager has retained its negative weighting to equities, while it is neutral on listed real estate.
Van Leenders said: “Equity markets are still being driven largely by the outlook for monetary policies. Indications that the slowdown in growth is less sharp than expected and that inflation is falling less quickly than expected, meaning that central banks will need to pursue a contractionary policy for longer, affected the equity markets in February.
“The fact that this had only a minor effect is a sign of investors’ hopes for a soft landing, in which inflation disappears without inflicting too much harm on the economy. The limited impact on corporate earnings also helped though. We continue to see enough negative factors to maintain an underweight in equities. Economic growth is weak and the risk of a recession hasn’t yet dissipated.”
“Central banks are tightening their monetary policies. It’s highly unusual for the low to be reached on equity markets before a recession starts or before central banks switch to cutting interest rates,” he added.
“The underweight is larger in the US than in Europe because of the higher US equity valuations, warning signs that herald a recession and weaker earnings growth.”
In terms of fixed income, the firm’s weighting to government bonds is negative, while it remains neutral on investment grade credits with their small allocation to govvies focused on shorter durations.
Van Leenders said: “The Fed isn’t yet getting what it wants. The US jobs market is hardly cooling at all and financial conditions, such as 10-year bond yields, spreads on credits, equity prices and the US dollar, are not yet playing along properly. Markets have recently priced in a much higher number of interest rate increases, however, which shows that the Fed’s message is starting to get through.”
However, emerging market debt could provide a source for returns in the current economic environment, with Van Lanschot Kempen maintaining its neutral stance on the asset class.
He added: “To have a positive outlook for bonds in US dollars we need greater clarity on falling inflation and an end to interest rate hikes in the US. For bonds listed in local currency it’s positive that the end of interest rate increases in emerging markets is coming into sight.
“This is mostly because central banks in these countries started to raise interest rates before the Fed and the ECB. Given the relatively high interest compensation we hold a neutral outlook for emerging market debt in US dollars and in local currency.”
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