Macro outlook - 12 August 2010

12-08-2010

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

World economy slowing down, double dip unlikely

Highlights

  • A maturing inventory cycle, less fiscal stimulus in developed markets and monetary tightening measures in some major emerging markets will result in somewhat slower growth for the world economy in the second half of this year. Monetary policy in developed markets will remain loose. The European debt crisis has been contained for now. And inflationary risks in emerging markets have diminished.

  • The prospects for stocks are brightening, moderate growth with a loose monetary policy are an attractive mix. The key risk factors remain deflation and how well Chinese economic growth will be managed. Without risk, there is no return, but from a seasonal perspective we prefer to hold on to our neutral view of the stock market.

  • Real estate remains a puzzling asset class. Since the markets bottomed in March 2009, real estate performance has been better than stock performance. The valuation gap between real estate and stocks has been growing. Currently, investors pay a forward P/E ratio of 23.2x  for real estate and 11.8x for stocks. Therefore, we remain hesitant to be more positive over real estate than over stocks.

  • We have a strong preference for corporate bonds over government bonds. Spreads have fallen somewhat over the last two months, and from a long-term historical perspective there is room for more spread compression. We are sticking to the view that credits offer better risk-adjusted returns than high yield, as they are a more defensive play.

  • Yields on government bonds in countries perceived as safe havens are at extremely low rates, and are likely to stay there for the next few months. With monetary tightening still a long way off, it is not the time to anticipate long-term inflationary risks by becoming negative on government bonds. We prefer to generate extra return by buying corporate bonds.