Macro outlook - 11 May 2010

11-05-2010

Ronald Doeswijk, Léon Cornelissen and Lukas Daalder, Senior Strategists with Robeco’s Economic and Financial Markets Analysis team, share their outlook.

Liquidity problem addressed, solvency issue remains

  • After the Greek debt crisis ran out of control, European leaders have moved significantly and stabilized markets by presenting a rescue plan of EUR 720 billion. Meanwhile, the European Central Bank took the unprecedented step to intervene on debt markets to an unspecified amount. The rescue package, huge as it is, does not solve the structural problems in the euro area. A liquditiy crisis has been averted, doubts about solvency of selected euro countries remain.

  • The world economy is showing surprising strength, but general monetary tightening in emerging markets and increasing worries about the sustainability of government debt policies is dampening investor’s appetite for risk.

  • The UK election system has produced a rare impasse. The risk of a loss of UK’s current AAA-rating has increased, as have downward risks for the British pound due to lack of progress in fiscal consolidation.

  • We have changed our outlook for stocks during week 16 as we are no longer positive on stocks. We expect stock markets to trade sideways with some elevated volatility. Economic growth and earnings will have increasing difficulties to surprise. On the other hand the market will keep worried about the state of government finances.

  • Simultaneously with our change in view on the asset mix, we have made a shift in our regional preferences. We are now negative on Europe and positive on North-America.

  • Government bonds are less attractive than corporate bonds, but compared to cash the investment perspectives do not differ a lot as we foresee no wild swings in long term interest rates, apart from peripheral countries with debt woes.

  • Our enthusiasm on cyclicals is waning. We are no longer very negative on the defensive sectors telecom and utilities. We hold on to our somewhat cautious view on financials. The uncertainty around future regulation remains a negative, while sovereign debt crises could hurt the sector significantly.