Macro outlook - november 2010

15-11-2010

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

Stronger growth and QE2 to push up risky assets

Highlights

  • The Federal Reserve has initiated a second round of quantitative easing (QE2), slightly more than the generally expected USD 500 billion. This program, which is already pushing up equities and commodity prices, and driving down the dollar, coincided with signs of accelerating growth all around the world. The latest Chinese and US PMI readings both beat expectations, for instance. This bodes well for the prices of risky assets in the months to come.

  • We upgraded the outlook for equities from neutral to positive during the last month. We do not expect spectacular returns, as we forecast returns in the range of 5-15% over the next 12 months. We believe that stocks are close to breaking out of their sideways trading pattern that started in late April, given that moderate growth is not that bad for equities. Earnings growth is set to continue and M&A might pop up as a driver for stock markets. We do not believe that valuation is a positive factor for equities, even though the VIX index and corporate yield spreads suggest that risk premiums are above average.

  • As we expect real estate to perform in line with equities, we have also raised the outlook for the asset class from neutral to positive. The valuation of real estate is a little higher relative to stocks than it used to be, but earnings are starting to rise.

  • We remain very bullish on corporate bonds. In addition to an attractive yield premium, corporate bonds offer the prospect of a further decline in yield spreads. Moderate economic growth is unlikely to trigger an exceptional number of bankruptcies; nor do we expect companies to overpay in the M&A market.

  • Within equities, emerging markets remain our favorite region. The economic outlook is good, while the earnings outlook for emerging markets now matches the outlook for the wider equity universe. Valuation is also more or less in line with developed markets’. However, momentum is stronger and the long-term economic outlook is less depressed by aging or government debt. We have no clear preference between developed markets regions.