Macro outlook - 14 July 2010
Ronald Doeswijk, Léon Cornelissen and Lukas Daalder, Senior Strategists with Robeco’s Economic and Financial Markets Analysis team, share their outlook.
World economy losing momentum but no double dip
Highlights
Gradually fading government stimulus, a maturing inventory cycle in developed markets and tightening measures in the large emerging economies are resulting in slower momentum for the world economy. The rhetoric of policymakers worldwide has shifted towards the need for budgetary consolidation. The reality will probably be less severe than the rhetoric. Meanwhile, with core inflation rates in major economies trending downwards, monetary policy will probably remain loose. We expect volatile but sideways-trading markets.
The European debt crisis will not be solved in any meaningful way in the months ahead, raising the specter of a sovereign default some time in the future and new strains on the financial system.
Earnings have turned around. At present, the number of earnings upgrades is roughly equal to the number of downgrades. The consensus forecasts average earnings growth worldwide of 35%, which we believe to be a realistic estimate. With economic growth softening, we no longer expect significant earnings surprises, as occurred in recent quarters.
Rates on government bonds are at extremely low levels, at least in the countries that are perceived as safe havens, while the rise in spreads on peripheral eurozone bonds over their German counterparts seems to have halted in recent weeks. Nevertheless, we do not expect a surge in safe-haven interest rates in the months ahead.
Within equities, we prefer defensive sectors, more specifically consumer staples and telecom, as they have an opportunity to extend their good relative performance in a volatile, sideways-trading market.
In the long term, another price explosion in commodities could occur, just as in 2008, due to demand from the growing global middle class. But, for now, the prospects are not that bright.