Macro outlook - 14 September 2010

14-09-2010

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

Double dip fears abating

Highlights

  • A string of weak macroeconomic figures in the US and Japan has raised the specter of an uncommon double dip. Bond markets seemed to be pricing in a deflationary scenario for the world economy, with long yields coming down to unprecedented levels. But a strengthening of the purchasing managers' indices in China and the US has lifted the mood. In our view, a double dip is still unlikely. The increasing deflationary tensions in Japan and the ongoing 'silent' sovereign-debt crisis in the eurozone are continuing worries. Diminishing inflationary tensions in the large emerging markets have reduced the need for additional tightening measures there.

  • As the evidence mounts that a double dip is increasingly unlikely, stock markets might start looking forward to some gains. From a seasonal perspective, however, investing in risky assets becomes attractive in the fourth quarter, while September has a reputation as the worst month of the year. Furthermore, worries about debt in peripheral eurozone countries have rapidly returned. As a result, we prefer to maintain our neutral view on the stock market. And with long interest rates at historical lows, we believe it will be hard for real estate to outperform stocks.

  • We maintain a strong preference for corporate bonds over government bonds. Moderate economic growth is unlikely to trigger an exceptional number of bankruptcies. We expect more spread compression; US investment grade corporate bonds are trading some 50 basis points above their historical average spread. For high yield, this gap is 1.2 percentage points. We believe credits offer the best risk-adjusted returns, as they are a more defensive play.

  • Emerging markets are our favorite region within equities. The macroeconomic environment has improved. Valuation is not particularly attractive, but technical indicators have also improved. The renewed appetite for emerging markets is illustrated by their improving performance relative to other regions, as well as an earnings revisions picture that outstrips the other regions'.