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Macro Outlook | Cautious stance still warranted

28-11-2011 | News item Ronald Doeswijk and Léon Cornelissen, Senior Strategists with Robeco’s Economic and Financial Markets Analysis team, share their outlook.

Highlights

  • The world economy has slowed further but the US and Japan will probably avoid a double dip. China is on track for a soft landing. Europe is sliding into recession, however.

  • The shockwaves from Greece briefly deflected attention away from more important challenges for the eurozone: the risk premium for Italy has risen to a dangerous level, pushing long-term interest rates above 6.0%. The risk premium for France is already above 100 basis points and the country’s AAA rating is coming under severe pressure. The eurozone is entering what is widely expected to be a mild recession. Continued struggles for Europe look unavoidable.

  • We remain cautious on equities. We expect volatility to continue for a while. So despite this being the time of the year when equities often benefit from the seasonal performance anomaly, we feel it is still too
    early for bargain hunting.

  • In a historical perspective, the spreads of corporate bonds are still at high levels. That is particularly the case or investment grade bonds, which are pricing in a recession, which is by no means certain to occur. Moreover, the balance sheets of non-financial companies are stacked with cash. While the outlook for investment grade and high yield bonds relative to their government counterparts is thus improving, we would like to have more clarity on the outcome of the current political turmoil before moving in.

  • Within equities, emerging markets were the biggest beneficiary of the turnaround in sentiment, with a jump of more than 10% in a month. The region remains our favorite. Within developed markets, North America is best positioned, given that it has some—albeit sluggish— economic growth and a pragmatic central bank.

  • On the sector front, after huge volatility and political turmoil in Greece, as well as Italy’s problems looming in the background, we prefer to take a wait-and-see approach before retreating from our positive view on defensives and our negative view on financials.

Summary
The world economy has slowed further but the US and Japan will probably avoid a double dip. China is on track for a soft landing. Europe is sliding into recession, however. We remain cautious on equities. On balance, we expect volatility to continue for a while. So despite this being the time of the year when equities often benefit from the seasonal performance anomaly, we feel it is still too early for bargain hunting. In a historical perspective, the spreads of corporate bonds are still at high levels. That is particularly the case for investment grade bonds, which are pricing in a recession, which is by no means certain to occur. Moreover, the balance sheets of non-financial companies are stacked with cash. While the outlook for investment grade and high yield bonds relative to their government counterparts is thus improving, we would like to have more clarity on the outcome of the current political turmoil before moving in.
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